Michael Smith
Granite Springs Asset Management, New York, N.Y.

Recommends: ETFreplay.com (ETF Replay)
The rise of ETFs offers a rainbow of choices for portfolio design, which means that it's never been easier to customize risk allocations. But some strategic challenges are still immune to quick solutions, starting with the ambiguity of how a given asset allocation strategy would have fared through history.

Enter ETF Replay, which helps minimize the mystery by offering a Web-based platform for back-testing ETF portfolios. "We find it very useful," says Michael Smith, chief operating officer at Granite Springs, where ETFs play a key role in portfolio design. ETF Replay allows the firm to consider new portfolio design possibilities. The firm specializes in fixed-income strategies, though it's hard to use individual securities for smaller accounts for liquidity reasons. ETFs are a practical alternative, particularly for accessing the high-yield and muni markets, where trading volume can be thin. The SPDR Lehman Short Term Municipal (SHM) and iShares iBoxx High Yield Corporate Bond (HYG) ETFs are popular with the firm, for instance.

ETF Replay is hardly the only game in town. In fact, Smith says that Granite was using a popular but "clumsy" institutional platform before discovering the site about two years ago. "We had a hotshot intern from Brazil turn us on to it."

Among other things, the site can compare a new client's existing holdings with Granite's portfolio models. What if a client owns ETFs that aren't on the firm's preferred list? Selling the funds and rebalancing the mix to match Granite's models is one solution, but that may not be practical if the portfolio has embedded capital gains. In that case, ETF Replay can help the firm determine how much common ground there is between the existing allocation and Granite's benchmark portfolios.

Rick Ferri
Portfolio Solutions, Troy, Mich.

Recommends: indexuniverse.com, ETFdb.com (ETF Database) and Morningstar Principia
It's no secret that Rick Ferri likes ETFs. He's written several books on investing, and ETFs figure prominently in his reporting, including his latest work: The Power of Passive Investing (Wiley, 2010). Where does one of the leading ETF authorities go for the latest news and data on the popular funds? As you might expect, he uses a variety of sources, but he cites a trio of services in particular for most of his research: two free Web sites-IndexUniverse.com and ETFdb.com-plus Morningstar's Principia software, which charges a subscription fee.

Index Universe does a good job of staying on top of the ETF news, he says. "They really seem to catch everything in a day or two." For example, he was intrigued when a PowerShares small-cap value ETF recently changed its benchmark to the RAFI Fundamental Small Value Index. "I was interested to see if [the new index] is better than what I'm using." After reading about it on Index Universe, he added the fund to his list of ETFs to monitor. "I probably wouldn't have known about it otherwise."

Although Ferri's portfolio allocations change infrequently, he's always looking for new products that offer improvements. Few of the innovations in recent years pass muster with him, but he watches the ETF landscape closely just the same. He's a fan of ETFdb.com's fund-screening tool, although he double-checks the results against the screens on IndexUniverse.com and Principia. Definitions of small-cap value, for instance, vary, so different data sources may generate slightly different fund lists, he notes.

Allan Roth
Wealth Logic, Colorado Springs, Colo.

Recommends: Benchmarking with ETF/index mutual fund data
"I do a lot of benchmarking in my business," says Allan Roth, who counsels foundations and wealthy individuals. "I advise on over $1 billion," with an emphasis on advising. He doesn't manage money, he explains, at least not directly.
He's a consultant who dispenses recommendations on investment policy, target allocations and the tolerance limits that influence portfolio rebalancing decisions. Roth, the author of How a Second Grader Beats Wall Street (Wiley, 2009), is partial to indexing, though he also evaluates the active managers used by his clients. One of his priorities is analyzing track records against the custom benchmarks that he designs for clients. Naturally, he relies on investment data, most of which he finds gratis on the Web, such as Yahoo Finance and Morningstar's Portfolio Manager, which is free in its basic version.

"For the most part, I benchmark against practical indices," he says. "I develop weighted average benchmarks, and it's usually based on real products." For example, a client who uses a mix of active managers in a domestic stock/bond portfolio might be benchmarked against two Vanguard ETFs: the Vanguard Total Stock Market fund (VTI) and the Vanguard Total Bond Market fund (BND). "I'm a believer in broad benchmarks," he says-as well as investable ones.

Roth tells clients that if they are going to pay more for active managers, they must see a measurable payoff. "If they're paying a manager a lot of money, [the manager] better be beating the benchmarks." Over time, the indexing argument has persuaded clients to move away from active strategies. "They fire managers and don't hire new ones." Quite a few clients have started with an all-active portfolio that evolves into a part active/part passive one.