When the first U.S.-listed exchange-traded fund was launched back in 1993, the idea of using ETFs as portfolio building blocks for individual investors hadn’t yet gained momentum. The menu of choices was thin, and ETFs were largely viewed as esoteric. As a result, financial advisors trailed institutional investors in both their understanding and use of ETFs in the early days.
Fast forward to now: Advisors have joined the party by embracing ETFs, which helped boost assets in U.S.-listed exchange-traded products to $2.47 trillion by the end of November, according to research and consulting firm ETFGI.
In the last year alone, more than half (52%) of registered investment advisors say they’ve increased exposure to ETFs, according to a 2016 Charles Schwab survey of RIAs. But will the uncertainty about the new year ahead and changes at the White House alter advisors’ view about ETFs?
ETF Advisor caught up with two advisors: David Kreinces, founder at ETF Portfolio Management in Thousand Oaks, Calif., and Larry Steinberg, partner at Financial Architects in Pasadena, Calif. Both advisors build and manage ETF portfolios.
DeLegge: How do you choose among the growing lineup of ETFs in order to build client portfolios?
Steinberg: I look at the asset classes I want to have exposure to first and then work backwards to the security that gives the best exposure. I do like securities that offer new and unique ways to give that exposure with the least risk possible.
Kreinces: I focus on maximizing investor safety, first by using core asset class ETFs from the largest fund companies. These ETFs mainly include global equity, real estate and long-term Treasurys from Vanguard, iShares or Schwab. Next, we employ tactical trend following rotation to manage risk, and to add leading sector ETFs as needed, such as semiconductors with the SMH [VanEck Vectors Semiconductor ETF]. In general, we prefer large-sector ETFs with over $100 million in assets and favorable price trends.
Lastly, we research top new investment strategies, such as “risk parity with leverage,” and employ leading leveraged asset class ETFs from the largest leveraged fund families, like Direxion and ProShares. Our research concludes that growth and income portfolios with leverage, such as our ETF investable benchmarks, are the most important innovation on Wall Street for individual investors since the creation of the index fund.
DeLegge: How would you define your approach to portfolio management?
Steinberg: I follow the “Household Endowment Model.” In other words, my portfolios are going to look more like Yale’s and less like the traditional Wall Street 60/40 mix.
Kreinces: We specialize in flexible combinations of indexing and trend following, with overriding risk controls, to maximize long-term results. Our flagship 50/50 I&G 3x portfolio combines efficient income and growth with leverage, and disciplined trend following. Overall, our portfolios deliver broad diversification by asset class, and by investment process, with the tactical use of leverage and cash as needed.
DeLegge: Do you have a sample or “model” portfolio for a 50-year-old conservative investor profile?
Steinberg: I would not suggest a generic “model” portfolio for a hypothetical 50-year-old conservative—or any other—investor. I might instead answer that, just as there is no “model” 50-year-old investor, there is no model portfolio. Portfolios must instead be constructed in response to each individual investor’s risk tolerance, investment objectives, time horizon, liquidity needs, etc. Since these factors vary so much from person to person, it would be misleading to suggest any one portfolio that may be appropriate or suitable to any two people.