Managed ETF portfolios gaining popularity

Your Investments: Investors have turned to ETFs as a way to gain stock market exposure in a cheaper and potentially more profitable way.

By AARON KATSMAN
March 7, 2012 22:39
4 minute read.
Chinese markets, China shares

Chinese markets, China shares_311. (photo credit: Reuters)

 
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The explosion of Exchange Traded Funds (ETFs) has been well documented.

Investors, armed with substantial data that says that the overwhelming majority of fund managers underperform their market benchmarks, have turned to ETFs as a way to gain stock market exposure in a cheaper and potentially more profitable way.

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Getting dizzy

Over the past 6-7 years, there has been an explosion of new ETFs, with hundreds of new products hitting the market, leaving investors scratching their heads trying to figure out which ETF is a good fit for their portfolio. It’s like you need a PhD to make heads or tails of all these products. As ETFs have gained in popularity, there is now one for almost every index under the sun. My favorite is an ETF that specializes in metabolic endocrines – whatever that is. There are now “inverse ETF’s‚” which are a way to make money when the market drops. Leveraged ETF’s have become hugely popular, especially among day traders, as they enable investors to get up to 3 times the leverage on a particular index. There are also a slew of ETFs in registration that will track particular hedge-fund strategies, and even actively managed ETFs.

So while all these products exist, what are investors supposed to do? On the one hand, they understand the benefits of using ETFs. On the other hand, how on earth is someone going to sort through all the various ETFs available and be able to use the correct ones for his portfolio?

Managed ETF Accounts

It’s this quandary that has been the catalyst for managed ETF accounts. Investors are turning to professional money-managers to handle their portfolios using ETFs. Asset managers have sprouted up faster than weeds in order to capture the huge amount of assets up for grabs looking for this type of product. The sheer numbers bear out this fact.

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“Taking into account discretionary and nondiscretionary assets and model portfolios, investment researcher Morningstar estimates that the total ETF managed portfolio space accounts for $40 billion to $100 billion in assets,” writes Andrew Gogerty, the ETF managed portfolios strategist at Morningstar.com.

I think it’s safe to say that managed ETF accounts are the fastest-growing segment of the money-management business.

One of the essential reasons that this type of managed portfolio has taken off is due to newfound accessibility to smaller investors. Whereas a few years ago a minimum investment would have been between $250-500,000, many firms have substantially lowered the minimums.

Tom Lydon of ETF Trends writes, “Advisory firms manage all-ETF portfolios for some investors, but the catch is relatively high account minimums. As more individual investors show interest in ETFs, the higher account minimums are not suitable. In turn, some of the larger advisory firms are lowering account minimums to help target a bigger investor pool.”

Discretion

It’s important to note that when speaking about managed accounts you are talking about giving the portfolio manager discretion over trading. This means that the manager can make decisions without speaking to the client first, which can be an advantage when a decision needs to be made quickly. In the more classic model of a broker and client relationship, the broker needs to get the client’s approval before initiating any transaction. The problem with this is that the time it takes to obtain the client’s okay can often be costly, especially if he is not easy to reach.

All-Inclusive Wrap Fee

Managed accounts charge an annual management fee that is based on the amount of money under management. Generally, all trading costs of the portfolio manager are included in this fee. This puts the client and the manager on the same side of the table, and eliminates any conflicts of interest that a manager may have from selling products and receiving commissions for them. As the value of the account goes up, the manager makes more money; conversely, if the value drops, the manager makes less.

Speak with Your Adviser

To see if managed ETF accounts are for you, it’s important to speak with your investment adviser. Your adviser needs to understand both your short-term and long-term financial goals, and then see if this type of managed account will provide you with an effective solution.

Aaron Katsman is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, MSRB, SIFMA.

For more information visit www.aaronkatsman.com  , call (02) 624- 0995 or email aaron@lighthousecapital.co.il.

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