Based on the headlines in the financial press (including this publication), one would think exchange-traded funds are an unstoppable force that are taking over the investment world. To some extent, that’s true. But not all financial advisors have gone gaga for these products, and you can put Robert Schmansky in that camp. A solo practitioner who runs Clear Financial Advisors LLC in Livonia, Mich., Schmansky has gradually eased ETFs into his client portfolios. While these products now hold a sizable chunk of his clients’ assets, he’s selective in how he uses them, and he isn’t looking to be a first adopter of the next wave of newfangled ETFs hitting the market.

Schlegel: Please describe your practice regarding your clients, investment focus and services offered.

Schmansky: My client base is pretty wide-ranging. I’m growing primarily through online marketing, which is mostly websites, blogs, referral sites and other sources. I tend to connect with people searching for a fiduciary or an independent advisor. They may have heard about the fiduciary concept from a book or radio program and eventually come across my website.

I am currently a solo and work both on an AUM and hourly basis. Clients range from late 20s who started with an online advisor and knew there was something missing from that relationship, to those approaching retirement who have never worked with an advisor.

Schlegel: What’s your approach to portfolio management, and what role do ETFs play in that?

Schmansky: I’m a believer in passive investing as the best approach for most individuals to create a purposeful investment plan. I’ve been a supporter of Dimensional Fund Advisors and have used their funds for over 10 years, including at prior firms. Client accounts are very diversified globally, both in equities and bonds. I use a fair amount of real assets as a tool to diversify against risks in the portfolio, and outside of it. I tell clients our investments in metals and real estate have a little bit of an insurance aspect; at times they may not add to returns, but a 4% to 8% investment may help hedge against the risk of inflation on their bonds, pensions and wages.

When I started my firm six years ago, I was using a custodian that did not have a no-commission ETF platform, and my portfolios were probably 85% mutual funds with only a small amount of ETF exposure in gold and silver funds. As I’ve grown and changed custodians, I’ve found more uses for ETFs, and it is entirely due to the no-commission funds. Today, ETFs make up half of invested assets.

Schlegel: How do you choose ETFs for your client portfolios?

Schmansky I have somewhat of a love-hate relationship with ETFs. My strong preference is toward mutual funds, but there’s no denying the value that ETFs can provide in liquidity and low transaction costs. I start with a custodian’s no-commission list, but there are times when I’ll use a commission fund. I start with my models that are mutual fund-based, and for each fund I have an ETF or a mix of ETFs as an alternative. From there, I’ll look at the individual client’s circumstances. What is the size of the portfolio? Is a client closer to taking withdrawals? Is any part of the portfolio at risk for being tapped into in the next several years? A client’s personal factors determine how much of the portfolio tilts towards the ETFs.

Schlegel: How has the role of ETFs evolved in your practice, and do you see them playing a bigger role?

Schmansky: Originally I viewed ETFs as a tool for niche areas. Today, I use them almost exclusively in accounts under $250,000. Transaction costs trump any advantage a fund may have for clients in this range. For higher balances, I look for opportunities to add mutual funds, and I think of it similarly to a core and satellite approach. If I’m purchasing a mutual fund today, it is for the long term. This is the core that we’re going to hold on to. I’m trying to hold as much in funds as I can and use ETFs for liquidity and rebalancing on the margins.

One of the lessons that I learned in holding a strictly mutual fund portfolio came in 2015 when the markets were largely flat, and rebalancing opportunities just weren’t large enough to justify a trading fee. In 2016, I moved to a custodian with a no-commission ETF platform, and it’s allowed me to both rebalance more often, but also to diversify low-balance accounts in a more custom portfolio. In the past, I would use between one and four fairly diverse mutual funds and had a set-and-forget approach. With ETF shares priced as low as $20, very diverse portfolios can be created with just a few hundred or a thousand dollars.

Schlegel: Do you favor any particular fund providers, or are you provider agnostic?

Schmansky: Vanguard, iShares and SSgA make up the majority of my core holdings. I use a lot of funds that complement areas most workplace plans lack, such as the Vanguard FTSE All-World ex-US Small-Cap ETF (VSS), SPDR Dow Jones International Real Estate ETF (RWX) and iShares TIPS Bond ETF (TIP).

Schlegel: Do you have any interest in the new wave of smart beta and factor-based ETFs?

Schmansky: Being a DFA believer, I certainly see value in weighting a portfolio towards areas like small and value, both for the potential in returns, but it’s also about not putting all of our eggs in one basket or one part of the market. New takes on how to best weight a portfolio are interesting, but I’m probably going to be on the sidelines with funds until the performance history is there and fees come more in line with traditional index ETFs.

We’ve also seen many products, including ETFs, not survive in the market, good idea or not. For most portfolios, I try to keep a fairly balanced approach across size with a tilt to value, and I find that can be accomplished with a few traditional index ETFs.