ETF Portfolio X-Ray: 3D Asset Management

There is no single recipe to building an ETF portfolio. But understanding how a portfolio is built is key to picking the right one. And choices certainly abound, with hundreds of ETF strategist portfolios commanding nearly $100 billion in combined assets today.

For that reason, we are setting out to better understand how ETF strategists go about creating these portfolios in a series of interviews that look under the hood of some of the ETF portfolios available to retail, institutional and advisor clients alike.

Today’s Portfolio: 3D Global 80

Provider: 3D Asset Management; East Hartford, CT

Who we talked to: Benjamin Lavine, Chief Investment Officer

Portfolio AUM/AUA: $113.5 Million

Primary Goal: The 3D Global 80 ETF Portfolio is an asset allocation portfolio designed for investors with a “moderately aggressive” appetite for risk. The portfolio uses ETFs to target an 80% equity, 20% fixed-income mix that’s global in scope. The strategy sets out to deliver outsized risk-adjusted returns relative to a blended benchmark consisting of 80% MSCI All-Country World Index and 20% Barclays U.S. Aggregate Bond Index.

The equity portion of the mix favors stocks such as small-cap, value, quality, momentum and low volatility. The fixed-income part of the portfolio favors sectors that generate “superior” income. (3D also manages a tax-sensitive version of the strategy.)

Methodology: 3D uses a dynamic asset allocation approach that blends the strategic benefits of long-term investing with the flexibility to position around significant market-moving events. Essentially, the approach to asset allocation targets capital market returns, and “is ideal for goal-oriented strategies such as time-segmented retirement income programs.”

As Lavine put it, “In the spirit of Fama/French, we believe much of what an active manager delivers can be systematically replicated using factor portfolios mimicking active managers’ styles and decision rules. We invest across time-tested factors (or strategic betas) that have historically rewarded investors over the long run.”

The process identifies and weights factor exposures across major global equity markets rather than rotating in and out of market regions. Occasionally, the portfolio will own low-correlated equity alternatives such as REITs and commodities for diversification and to dampen risk.

Target Client: 3D primarily targets fee-only financial advisors and institutional plans.

Asset Allocation breakdown: (as of 3/31/2016)

U.S. Stocks: 32%

International Stocks: 30%

Emerging Markets: 10%

Alternatives (REITs): 8%

Fixed Income: 20%

ETFs:  100%

ETF Included in This Portfolio: 3D Global 80 Portfolio (as of 3/31/2016)

U.S. Stocks:

• Vanguard Value ETF (VTV | A-100)
• iShares Edge MSCI USA Momentum Factor ETF (MTUM | A-69)
• FlexShares Quality Dividend Defensive Index Fund (QDEF | B-82)
• WisdomTree SmallCap Earnings Fund (EES | B-88)

International:

• Goldman Sachs ActiveBeta International Equity ETF (GSIE | D-76)
• iShares Edge MSCI Intl Value Factor ETF (IVLU | D-80)
• FlexShares International Quality Dividend Index Fund (IQDF | B-82)

• WisdomTree International SmallCap Dividend Fund (DLS | B-81)
• FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund (TLEH | F-34)
• First Trust Emerging Markets Small Cap AlphaDex Fund (FEMS | D-52)

Alternatives:

• FlexShares Global Quality Real Estate Index Fund (GQRE | C-76)

Fixed Income:

• WisdomTree Barclays US Aggregate Bond Enhanced Yield Fund (AGGY)
• PowerShares Variable Rate Preferred Portfolio (VRP | B)
• First Trust Senior Loan Fund (FTSL | C)

Fees: The underlying expense ratio is 0.39%. But fees vary depending on platforms. For turnkey asset management (full services), 3D’s fee schedule begins at 0.50% and scales down with assets under management. Advisors can also access the portfolio through Envestnet, Adhesion and Mid-Atlantic.

Performance as of 5/31/2016:

YTD: 3.55% (vs. 1.85% for blended benchmark); 1-year: -2.16% (vs. -3.80% for blended benchmark)

Contact Cinthia Murphy at [email protected].