Strode: The iShares Preferred and Income Securities ETF, ticker PFF, which yields roughly 5.3 percent. We also use Invesco’s S&P 500 High Dividend Low Volatility ETF, ticker SPHD, and that yields about 4.4%.

FA: Regarding targeted niche products in general, what’s your criteria for using these types of ETFs?

Strode: A lot of times we like an investment idea and we know a particular ETF will give us pure exposure to that idea. With fallen angels, for example, these are corporate bonds that were investment grade but fell to junk, or high-yield status and are bought by the fund after they been classified as high-yield. Many investment companies’ mandates prevent them from holding non-investment grade, so these bonds often see additional selling pressure when they are reclassified to junk status. We believe that’s a good strategy for high-yield exposure, so we use the VanEck Vectors Fallen Angel High Yield Bond ETF. The ticker is ANGL.

FA: How do you approach factors in your portfolios?

Strode: The two main factors we use are quality and low volatility because we believe the risk-return tradeoff on these factors are beneficial. For quality we use QUAL by iShares [iShares Edge MSCI USA Quality Factor ETF]. With low-vol we also use iShares Edge ETFs such as the iShares Edge MSCI Min Vol Global ETF.

FA: Do you do much with actively managed ETFs?

Strode: We don’t use a lot of them, but we do use some. One is Pimco’s actively managed bond ETF, ticker symbol BOND. The hard part for us regarding actively managed ETFs is they’re fairly new and don’t have long track records, and as a result many of them have not experienced a prolonged bear market. Additionally, a lot of the newer ETFs are typically smaller, which can be a problem with trading as we run into issues when we trade more than10 percent of the daily average trading volume, so multiple executions are required. That can be a little bit of a hassle. Also, with smaller funds you have to pay attention to the bid/ask spread, and many times it is beneficial to ‘work’ the trade.

We do believe there’s still a role for actively managed mutual funds in the fixed-income space as we feel there are still some inefficiencies where managers can add value. That said, we have transitioned a majority of our equity exposure to passive investments.

FA: Any drawbacks to using ETFs?

Strode: As mentioned earlier, if you’re using smaller ETFs you have to pay attention to bid/ask spreads. Also, the ETF space is limited in areas where we believe active management can work. For example, actively managed funds with bottom-up management that employ certain characteristics such as GARP (growth at a reasonable price) or relative value can be tough to find in an ETF wrapper.