Have You Reviewed Your ETF Strategist Recently?

Posted on: 08/12/2014

iSectors® Post-MPT Growth Allocation Featured in Barron’s on August 2, 2014

In the article, the Barron’s columnist, Brendan Conway, discusses the growing use of ETF strategist models by advisors to meet their clients’ goals. He noted, “These products aren’t cheap.”  The comparison of fees below confirms his assertion. “The hottest trend in asset management,” Conaway wrote. “There’s now more than $100 billion in these pre-made portfolios of ETFs, after a jump of 40% last year, according to Morningstar.”  He continued, “When they work, they can work well. Industry watchers like Matt Hougan, president of ETF.com, argue that these ETF strategists will become the next generation of active managers. These portfolios are designed to answer investors’ situations.”

Conway pointed out that many of the ETF strategists’ products have very little in the way of track records.  “…of the little more than 650 strategies tracked by Morningstar, just slightly more than half have a 5-year record…many of their managed portfolios are based on back tests and financial engineering,” he said. (Note that the iSectors® Post-MPT Growth Allocation, at this point, has a full 9.5 years of actual client performance.)

Fees, ETF returns, and risk statistics of iSectors and competitors

With regard to iSectors® specifically, Conway wrote, “Understanding the typical ETF managed portfolio requires some investing acumen. Take one of this year’s top performers, iSectors® Post-MPT Growth Allocation, which is up nearly 12% this year.  With a 0.6% management fee {the iSectors investment management fee is actually only 0.3%; the other 0.3% of fees in our disclosure are platform and custodial fees charged by unrelated parties}, this portfolio is based on a nuanced argument that fund managers misinterpret modern portfolio theory – that’s the ‘post-MPT’ in the strategy’s name – and the answer is a complex formula of more than a dozen variables and nine asset classes, which may include leveraged ETFs.  The strategy was invested about one-third apiece in the health-care and energy sectors as of July, and benefited from a position in gold in the second quarter.  Its five-year annualized return is 18% – which you can check yourself on Morningstar’s Website.” 

Mr. Conway also discusses some of the well-published problems that have surfaced recently with a number of the largest ETF investment strategists in the article, and appropriately recommends that advisors do their homework by putting these ETF strategists and their products through an appropriate due-diligence review as they would any other investment they recommend to clients.

Follow this link to Barrons.com to read the article (subscription may be required).



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