ETF Model Portfolios Change Advisory Biz

June 27, 2014 The biggest asset growth in the ETF model portfolio space has been on the strategic core, cheap beta. Why is that?

Friederich: Part of it has to do with risk. Many advisors can incorporate some tactical—the more aggressive tacticals are probably the most popular in that case—but they can only incorporate, say, 10 or 15 percent of a global tactical unconstrained strategy into their moderate client.

Of course if that client is aggressive, they can add more tactical exposures, but our data show that most clients today are profiled as moderate. We’re talking some sort of 30/70, 50/50 or 60/40 stocks/bond portfolio, that kind of middle-risk bucket.

So they need to have that core strategic beta foundation, and then they can buy slivers and combine the global tactical guys around that core foundation. We’ve seen more flows into strategic efficient cheap beta simply because they’re looking for that core foundational element. Outside of strategic beta, is there a particular tactical strategy that is resonating more with advisors in the current environment?

Friederich: On the fringes, depending on the range of risk their client is comfortable with, advisors are adding more unconstrained strategies, both on the equity and bond spaces, but probably more so on the fixed income as of the last six months.

We’ve seen a lot of development in unconstrained bond funds, and a lot of requests for that in terms of mutual funds as well as the ETF strategies, because given interest rate levels and the environment in the fixed-income market, you can’t just buy and hold as you might have done historically. Other than unconstrained bond funds, are there other building blocks that advisors are looking for when it comes to ETFs and ETF portfolios?

Friederich: There’s a lot of product out there. I think folks have done a good job of listening to client demands. Beyond unconstrained bond funds, there’s demand for sort of multi-asset income strategies.

We have all these higher-yielding ETFs that advisors have been probably buying and choosing on their own, but now they don’t know which one to buy next, or which one to sell.

Now, there’re strategist managers who do all the tactical trading around to get to a yield target—say, 5 to 8 percent—while making sure to protect capital. They go to advisors and say, “You’re searching for yield. Here is our yield target.” These have been just as popular even with shorter track records.



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