ETF Wolves in Sheep’s Clothing: Financial advisors are increasingly using passive, index-tracking ETFs to implement strategies that are just as active as what you’d find in the most aggressive mutual funds


Wolf in Sheep’s Clothing


Financial advisors are increasingly using passive, index-tracking ETFs to implement strategies that are just as active as what you’d find in the most aggressive mutual funds.


Some pairings just make sense — Scarlett and Rhett, peanut butter and jelly, exchange-traded funds and index investing. But when the pairing is put into a different context — a campy musical version of Gone with the Wind, or a PB&J-filled breakfast cereal — it becomes a distinctly different thing. And that “different thing” is happening in the world of ETFs. Financial advisors are increasingly using passive, index-tracking ETFs to implement strategies that are just as active as what you’d find in the most aggressive mutual funds. For some investors, it’s a natural fit. But for others, particularly those drawn in by the allure of passive ETFs, it’s going to be stomach-churning.The appeal for advisors is simple: They can execute their strategy more efficiently using index ETFs. Many manage their portfolios, some fairly passive, others extremely active, through Morningstar, which tracks the results. Assets in these portfolios surged 60% last year, to $63 billion. That growth rate is likely to continue. “ETFs allow us to react much more nimbly,” says Duncan Rolph, a Los Angeles–based financial advisor whose firm manages more than $200 million, 60% of which is in ETFs.

But how well does it work? Well, it’s better for investors to be in low-cost index funds, but when those funds are actively traded and tactically managed to take advantage of market trends, the advisor often falls short.

Morningstar’s ETF managed portfolios returned a median 10.28% during 2012, a bit lower than the 11.1% return a self-directed investor could have gotten from putting 60% of her money in the SPDR S&P 500 ETF (ticker: SPY) and 40% in iShares Core Total US Bond Market ETF (AGG). During volatile 2011, advisors in Morningstar’s data lost 0.05%, versus a 4.27% rise the 60/40 portfolio’s had. The most recent unfriendly market didn’t exactly showcase advisors’ talent for loss avoidance.

“The most important thing to make sure of is that the framework in which advisors are using this tactical priority is a framework that makes sense — that they’re not just doing it based on gut feel or economic data,” says Vineer Bhansali, who oversees Pimco’s quantitative investment portfolios. “Advisors need to have a feeling that something is really changing in the world.”

Rob Sechan, a financial advisor with UBS Wealth Management, says that while some tactical ETF traders will see quick rewards, activity does not equal success. Sechan says he tries to keep his trading “thoughtful,” adding, “It’s clear that the markets can get dislocated from time to time, and that’s mainly emotionally based.”

One thing the active-ETF gurus have in their favor: The idea that they’re not trying to hit home runs — and that investors aren’t demanding homers. Ben Marks, a financial advisor in the Minneapolis area, views tactical ETF trading as a pivotal strategy. He bought thePimco 0-5-Year High Yield Corporate Bond Index ETF (HYS) when he thought investors were irrationally selling bonds. The ETF is up 2.6% in the past month, rebounding from a sharp selloff, and Marks says he’s holding onto the stake.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: