Schlegel: Explain more about your use of thematic ETFs within your overall risk-adjusted approach.

Rapaport: We view thematic ETFs as more strategic than tactical investments. Our hope is that these investments may capture alpha in a tax-efficient growth vehicle. We estimate a holding period of more than three years.

We have utilized health-care ETFs over the past five-plus years. Over the past three-plus years, we have added infrastructure. More recently, we are including investments that focus on specific areas of technology, such as robotics and artificial intelligence.

The thematic investments we have selected invest globally. We believe the combination of the global and more sector-specific exposure provides an additional level of diversification. These ETFs do not just provide exposure to the traditional technologies giants found at the top of many market-cap-weighted indices.

Schlegel: Are you intrigued by the wave of smart-beta funds?

Rapaport: An important offering we provide our clients is education. It is important to us and our clients that the investment strategy can be explained and understood. As a result, we are selective in the area of smart-beta funds. We may utilize smart-beta products that are fully transparent and appear to have a focus on momentum, value, low-volatility, etc. We stay away from using “black box” type products.

Schlegel: How do you employ smart beta versus market-cap-weighted ETFs?

Rapaport: We do have some concerns regarding market-cap-weighted ETFs, as oftentimes the top holdings account for a disproportionately large percentage of the investment exposure. It is important that investors understand they may be investing in a concentrated portfolio, and thus incorporate it prudently into their portfolios.

Smart beta may provide an opportunity to be more diversified and may offer some downside protection. We strive to educate our clients that if the market declines 25%, you will need a 33% gain to break even. If the market declines 50%, you’d need a 100% gain. Thus, attempting to limit against large drawdowns while potentially giving up a portion of the upside may be a more prudent approach and may allow for a quicker recovery. This approach may be where something like a low-volatility ETF could be used.

Schlegel: What are you looking for in ETF providers?