Steve Stanganelli is the founder of Clear View Wealth Advisors LLC, an independent, fee-only RIA firm in Amesbury, Mass. He opened his one-man shop in 2010 and focuses on financial planning by dispensing guidance to clients who are mainly self-directed, as well as providing investment management to those who wish to delegate investment decisions to a pro. He’s been using exchange-traded funds in client portfolios since early in the last decade, and ETFs now make up roughly 70% of the assets in his clients’ portfolios.

Schlegel: What’s your investment philosophy?

Stanganelli: I focus on helping people create globally diversified portfolios using whatever means necessary to do that. One of the key things I do for clients is review and analyze their individual portfolio holdings whether it’s at the 401(k) level or their own individual brokerage accounts. They want to continue managing things themselves, but they’re looking for advice on it. I do what I call portfolio lab analysis.

While I generally focus on index funds either with mutual funds or ETFs, I also include stocks and closed-end funds and some actively managed mutual funds. The goal is to provide a well-balanced portfolio with a focus on keeping the costs low.

I began using ETFs while at a wirehouse firm in the early 2000s. When I joined a fee-only RIA firm, that firm’s principal used inverse ETFs from Rydex. When I left that firm I had the flexibility to create the kinds of portfolios I felt addressed client needs, and that’s when I started to use more ETFs. That was in 2010.

Schlegel: Describe the evolution of ETFs in your client portfolios.

Stanganelli: I reached the conclusion that many actively managed funds weren’t up to par, so I began looking for alternatives with funds families that have lower costs either on the mutual fund side or in ETFs. I gravitated toward Vanguard, mainly due to its reputation, breadth of offerings and the lower costs on both the active and indexed sides. Generally, their ETFs mirrored their index mutual fund offerings, so it became a natural progression to replace the mutual funds with the ETFs.

Schlegel: Are you strictly a Vanguard guy, or do you use other fund families?

Stanganelli: Vanguard tends to the core, but it’s not exclusive. I use BlackRock and State Street, among other firms. There are some higher-cost ETFs that I use selectively because of their story or their special sauce. An example of this is PEY [PowerShares High Yield Equity Dividend Achievers Portfolio]. I’ve also used NOBL [ProShares S&P 500 Dividend Aristocrats ETF]. Another alternative is PBP [PowerShares S&P 500 BuyWrite Portfolio].

All of these have special niches, whether it’s a special dividend focus, or in PBP’s case it’s more of a hedge focus.

Schlegel: Do you go for any of the thematic ETFs on the market?

Stanganelli: No. The kind of factors I tend to focus on are broad. I tend to focus on low volatility, so I have used USMV [iShares Edge MSCI Min Vol USA ETF] and EFAV [iShares Edge MSCI Min Vol EAFE ETF]. Those lower-volatility funds lagged when the market broke out in November, but that’s par for the course when it comes to diversification.

Schlegel: How do you choose your ETFs?

Stanganelli: What I look for when I screen an investment tends to be trying to compare things like upside/downside capture ratio, Sortino ratio and beta. When I’m doing a head-to-head comparison and the ETF is less expensive with better performance than the mutual fund, I’ll say [the client] should switch.

I tend to rely on independent resources, but I also go back to the fund families such as Vanguard or BlackRock because they have very good website tools. I pick my own ETFs but also utilize Betterment, another ETF user, for a small portion of my accounts.

The custodians I work with for my ETF platform are Shareholders Service Group, which clears through Pershing, and Folio Institutional.

One of the things that has made the use of ETFs practical for me are the tools available at the custodian level. Folio Institutional’s platform has no trading costs and what I consider to be a low asset-based custodial fee of 0.2% that covers all trading, reporting and other functions they provide.

Technology allows for things to make this possible for me. One, it gives me access to funds, ETFs or individual stocks in fractionalized units. So I can build the same portfolio for someone who has $1 million versus one who has $10,000. And one of the reasons why I moved toward ETFs is that mutual funds tend to have minimums.

Schlegel: Talk a little bit more about your relationship with Betterment.

Stanganelli: Because I’m always looking for ways to improve the client’s overall experience and performance, I’ve been following the whole digital advisor conversation and the offerings out there. I investigated the various options and settled on Betterment for a number of reasons, and it wasn’t just to provide a platform for the so-called smaller clients. I’ve used Betterment across a range of clients.

The rationale for me is they’re low-cost and index-focused, and it provides the ability to sometimes do what I don’t do—which is the automatic rebalancing. It is rules-based and there are no questions, and anything that automates things makes it simpler and takes out the emotion.

Folio also has the technology that allows me to place in every portfolio a threshold where it will kick in and do the rebalancing.
The rationale for Betterment is that I pass on the savings. My asset management fee for that program is very low, and that appeals to people looking for lower costs than a typical wrap account. The all-in costs for that platform, including the Betterment fee, is about 65 basis points, and 25 of that is Betterment.

Schlegel: Are there any drawbacks to using ETFs in client portfolios?

Stanganelli: In some respect, one drawback is the over-diversification factor. If you’re buying an ETF with a couple of hundred different holdings, it might not have the same alpha as a great stock picker who can pick a dozen stocks. And then there are the carrying costs that ETFs have. Even when you’re dealing with a Vanguard fund with seven to 10 basis points or funds such as PEY, which is closer to 40 basis points, it’s still cheap but not as cheap as buying and holding Procter & Gamble or Berkshire Hathaway. But you balance that off with what you’re trying to achieve. Are you trying to squeeze out the lowest costs and trying to get the biggest bang for the buck? But there are friction costs, and in some platforms those friction costs will be trading costs. I have those kinds of conversations with clients regularly to see how they feel about that. Some of the self-directed investors I work with are highly keen on the costs, and they want to squeeze them out as much as they can.

For investors who don’t want to spend time reading various reports on particular companies, there are ETFs—and index mutual funds—that replicate that and make your job easier. A fund like NOBL is rules-based and will hold dividend-paying stocks in equal weighting and will change the portfolio every so often, but you don’t have to deal with it. So yes, you’re paying an expense ratio, but you’re not paying any kind of research fee in the form of your own time.