Founded in 1978, Capital Advisors is an employee-owned registered investment advisor with headquarters in Tulsa, Okla., and a total of six offices in four states. The company has roughly $2.3 billion in assets under management, and its investment process employs a combination of fundamental strategies using individual equities and bonds, and quantitative strategies using ETFs. Scott Frantz, vice president and portfolio manager at Capital Advisors’ office in Frisco, Texas, discusses how his firm incorporates ETFs into client portfolios.
Schlegel: What type of clients do you serve?
Frantz: The majority of clients are individual investors, but we also serve institutions as well. We run our own investment strategies using separately managed accounts. We have a growth equity strategy, a dividend equity strategy and four tactical strategies where we use ETFs, and we can do bonds any number of ways such as customized fixed-income ladders. And we also do bond ETF strategies with smaller accounts that may not be able to get enough diversification by using individual bonds.
Our average clients generally have between $1 million to $3 million with us, though we have clients as low as $500,000 and those up to—and more than—$20 million.
Schlegel: Which types of clients do you typically use ETFs with?
Frantz: They’re used for both individuals and institutions, but I would say ETFs are primarily used for our individual clients and are used in a tactical manner to get exposure to different markets, themes and sectors. They’re also used as hedging tools, and as complements to other equity strategies.
We try to use ETFs with low expense ratios, and which are liquid and we can easily trade in and out of. That said, some of the international ETFs can have expense ratios north of funds like SPY and QQQ.
Schlegel: Your website says each client receives a customized portfolio. How do ETFs play a role in that?
Frantz: We start our on-boarding process by asking clients to fill out a risk-and-suitability questionnaire to give us a picture of their risk tolerance, goals and objectives. That guides us to the types and percentages of equities and fixed income in their portfolios. Then we look at how to complement these portfolios with our tactical strategies that use ETFs. We have a tactical dynamic strategy that goes in and out of the marketplace, and we use that as a hedging tool as well.
We manage that tactical dynamic strategy in a quantitative manner, and between four to six ETFs make up that strategy. And based on market conditions, we use our proprietary system to gauge when to get in or out of a particular ETF.