Huszczo: I’ll defer on that because the portfolio changes quite often. But we do use Vanguard because it’s one of the cheaper ones out there. Schwab has a huge network of commission-free ETFs, and we employ that for some of our smaller accounts. And Schwab has some cheap offerings of its own.
On the factor-based side we find ourselves shifting between providers because more companies are offering factor-based products. I just had some Vanguard people in my office this morning talking about the factor-based funds they came out with earlier this year. So in this infancy stage among factor-based funds, the search for the cheapest is an ongoing task.
Schlegel: What would you use if you didn’t have ETFs?
Huszczo: My alternative wouldn’t be mutual funds on the equity side, it would be individual stocks. With my CFA background I can analyze individual positions, and if ETFs didn’t exist that’s where I’d be right now. But there are problems that come with managing a lot of people with individual stock positions, and that’s where the ability to homogenize my model portfolios comes in handy.
Schlegel: Is price the main driver of the ETFs you choose?
Huszczo: Price is a way to differentiate ourselves from our competition from a client acquisition standpoint. There are still a lot of RIAs out there running mutual fund portfolios. I’ve seen where the planning profession’s 2017 survey showed the average all-in fee range for RIAs was between 1.3% and 1.75%. By using the cheapest ETFs we can find, we can get that down to 0.8% to 1.2%. So even the highest end of our range is less than the lowest end of our average competitor. I find when you put those numbers into a net dollar figure for a client, it’s very powerful.
One thing I learned early in my career is the specific index each fund tracks is vitally important. Not all small-cap, low-volatility ETFs are made the same. You have to know which index they’re tracking. You can have two ETFs with similar names but their returns can be very different. That’s why it’s important to talk with a provider’s wholesalers or research funds on Bloomberg and Morningstar to find out all of the stuff behind the scenes.
Schlegel: Do you consider yourself to be a tactical investor regarding factor-based funds?
Huszczo: I think there’s space to do sector rotation, but we don’t trade for trade’s sake. But if the statistics are showing overvaluation or undervaluation, we’ll play to those trends.
Schlegel: Are there any cons to relying on ETFs for the equity side of your portfolios?