Over the last several months, some of our readers have asked about the role of ETF strategists. Who are they? What do they do? This may be because the term is becoming increasingly common in the media. Therefore, we have decided to dedicate this article to describing the role of ETF strategists to our readers.

What is an ETF strategist?
ETF strategists are Registered Investment Advisors (RIAs) who build investment portfolios for clients and financial advisors by using mostly ETFs1 as the underlying investments in portfolios or models. These ETF strategists often run several asset allocation models for investors to choose from, ranging from conservative, balanced, and growth-oriented to a host of other more specialized models. Client accounts are usually set up so the ETF strategist can execute all of the trades in and out of the underlying ETFs, but sometimes the strategist simply sends recommended trades for the model to brokerage firms who conduct all of the trading for end investors. As of January 2018, there were over 175 ETF strategist firms throughout the United States and managing over $100B in assets.

What benefit do ETF strategists offer to end investors?
By using mostly ETFs, ETF strategists may be able to bring added tax efficiency to investor portfolios. It is generally accepted that ETFs are more tax-efficient vehicles than mutual funds. Beyond that, ETF strategists can be tactical with their asset allocation decisions, changing allocations quite often, including being willing to hold a large allocation in cash if markets seem to them to be overvalued or risky. This active asset allocation approach has the potential to offer investors a source of portfolio returns and material portfolio protection in the event of a market decline. The potential risks and rewards here are dependent in part on the ETF strategist’s trading decisions.

What benefit do ETF strategists offer to financial advisors?
Some financial professionals outsource their clients’ asset allocation to an ETF strategist. Some advisors find this can afford them more time to focus on growing their business or undertaking other client-related work such as financial planning or estate planning. Additionally, in cases where asset allocation is not necessarily their expertise, these advisors could be offering their clients a stronger investment value proposition by outsourcing this function.

What types of ETFs do ETF strategists use as building blocks in their models – do they use pure passive, Smart Beta2 and/or active?
Many ETF strategists have historically used mostly pure passive ETFs, and some Smart Beta ETFs, as the building blocks in their ETF strategist models. However, we are seeing an increasing number of ETF strategists starting to use active ETFs, especially considering the growth in the number of active ETFs in the market. Actively managed ETFs provide investors two opportunities to outperform, through asset allocation decisions and security selection decisions.

We hope this review of the ETF strategist role helps give you a better understanding of what they do and how it could help you. We will continue to bring you different insights over time on relevant ETF market topics.

 


1 An exchange-traded fund, or ETF, is a marketable security that tracks an index, commodity, bonds, or a basket of assets like an index fund. ETFs trade like common stock on a stock exchange and experience price fluctuations throughout the day as they are bought and sold.

2 Smart beta refers to an investment style where the manager passively follows an index designed to take advantage of perceived systematic biases or inefficiencies in the market. Smart beta strategies involve risk, including risk of loss.

Exchange-Traded Funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Unlike typical exchange-traded funds, there are no indexes that an active ETF attempts to track or replicate. Thus, the ability of an active ETF to achieve its objectives will depend on the effectiveness of the portfolio manager.

This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.

2167639.1.1