The growing universe of exchange-traded funds has led to the rise of ETF strategists, those portfolio managers who—according to one commonly used definition—employ a minimum 50% allocation to ETFs to create asset allocation strategies for both retail and institutional investors.
According to Morningstar’s “ETF Managed Portfolios Landscape Report” for first quarter 2016, (the most recent report as of late September), the fund research company was tracking 770 strategies from 156 firms with total assets of $76 billion. BlackRock estimates the ETF strategist space could grow to $706 billion in AUM by 2020. Whether that comes to pass or is just a hope (after all, BlackRock’s iShares ETF unit would profit handsomely from that growth), it speaks to an ongoing trend among multi-asset managers.
One of the long-standing asset managers in the ETF space is Sage Advisory Services, an Austin, Texas-based outfit with roughly $12 billion in assets under management and more than 2,000 client relationships. Over the past 14 years, it has created various ETF-based strategies in both debt and equities for institutional and private-client investors.
Sage was founded in 1996 by Robert Smith III and Mark MacQueen, who previously worked together at Merrill Lynch in New York and London before starting their new venture deep in the heart of Texas. They began as a fixed-income institutional investment firm with a bent toward asset liability-oriented solutions for insurance companies, defined benefit plans, corporate cash managers and the like.
They started using ETFs in 1998, and by their reckoning were one of the first managers to create an all-ETF strategy when their Tactical ETF All Cap Equity Plus offering debuted in 2002. According to Sage, this strategy seeks to provide strong risk-adjusted investment returns relative to the global equity market by investing mainly in core domestic and international equity markets, and by tactically allocating between 0% to 40% in non-core segments such as emerging market equity, commodities, real estate and currencies.
As the decade progressed and more ETFs launched to capture the global bond market, Sage was able to replicate its institutional Core Plus fixed-income strategy in an all-ETF format in late 2007. “It’s a reflection of what we do in our institutional fixed-income accounts—same strategy, same duration, same asset allocation and so forth,” says Smith, who wears the hats of managing member, president and chief investment officer at Sage. He adds that the cost efficiencies of ETFs enable the company to offer this strategy at much lower investment minimums.
The Core Plus fixed-income strategy aims to provide solid risk-adjusted returns relative to the Barclays Aggregate Bond Index by investing chiefly in core fixed income and then tactically allocating between 0% and 40% to non-core segments such as high-yield, non-dollar, emerging market debt and preferred stocks. In addition to these two offerings, Sage offers a series of tactical target-risk strategies using ETFs that range from conservative to growth, as well as an all-ETF target-date series.
“We’re about to launch an all-ESG global equity ETF strategy,” Smith says. “And we’re designing something for the fixed-income side, too, that hopefully will be in an ETF [format].”
Elsewhere, Sage is the sub-advisor on the actively managed AdvisorShares Sage Core Reserves ETF (HOLD), an ultra-short duration fixed-income ETF that launched in January 2014 and is built to be a money market alternative. “We do this internally for cash management for our clients, but we hadn’t had anything for the public,” Smith explains. “We felt this would work in a commingled vehicle.”
HOLD has garnered roughly $94 million in assets, recently sported a 30-day SEC yield of 1.11% and has a net expense ratio of 35 basis points.