Gregov sets the asset allocation based on the strategy he's designed to meet a portfolio's goals. Then he assumes an active management role in choosing the asset classes, which he envisions as sleeves filled with passive ETFs. These vehicles must be transparent, tax efficient, and low cost.
Gregov's team will screen ETFs and compare their index holdings against the fund's holdings. He’s mindful of tracking error, which can disappoint clients if they expect the fund to closely track its benchmark. For this reason, Gregov said he avoids actively managed funds because “active managers can't guarantee they'll be holding exactly what they say.”
Gregov said he also avoids funds with complex investment or tax strategies that are difficult for clients to understand, as well as highly leveraged ETFs that use derivatives or debt to amplify their performance against the benchmark. He considers them to be daily trading vehicles that can rack up transaction costs and push down performance.
The webinar’s takeaway is that ETFs do have some ancillary issues to consider regarding things like bid/ask spreads and liquidity, but overall they empower financial advisors to fulfill a strategic, active management role over client portfolios in a time- and cost-efficient way.
“Assuming there’s efficient tracking [of the underlying index], ETFs will typically represent the sector or strategy intended,” Gregov said.