In recent years, the non-stop growth of ETF managed portfolios has been one of the biggest stories in the U.S. retail investment space. Since 2008, this industry has exploded from relative obscurity to achieve more than $100 billion in assets through the second quarter of this year, according to Morningstar.
In a typical ETF managed portfolio, a financial advisor/RIA outsources investment management to an "ETF strategist," who builds strategies by combining ETFs. Although most ETF managed portfolios are structured as separate accounts, investors don't get much customization or tax management, and their personal advisors usually have little or no influence over the strategist's process and decisions.
In effect, these products are "packaged separate accounts" that work much like actively managed mutual funds or turnkey asset management programs (TAMPs), except that strategies are constructed from ETFs rather than individual securities or mutual funds. Many strategists follow quantitative systems, readjusting ETF exposures by formula.
Recommended For You
Although ETF managed portfolios often tout cost advantages over mutual funds or TAMPs, they can be expensive, with four layers of costs: strategy-level fees, advisor-level fees, ETF management fees, and ETF trading costs.
Strategies with high portfolio turnover also can be tax-inefficient. To date, there has been little analysis of the industry's cost-efficiency or tax-efficiency vs. actively managed mutual funds or TAMPs.
Somewhat predictably, the industry's momentum may have begun to cool, with Morningstar reporting that total assets of its ETF managed portfolio universe declined by $6 billion during the third quarter of 2014, despite a 1.1% return for the S&P 500 Index for the quarter.
What's behind the trend reversal? Some investors may be disenchanted with poor performance. For example, what had once been the industry's largest strategy, Good Harbor Tactical Core US, lost 18.25% during the first three quarters of 2014, triggering a 42% decline in YTD assets under management, according to Morningstar.
Other investors may be concerned by regulatory red flags, such as those that recently precipitated an SEC Wells Notice and change in leadership at the industry's largest provider, F-Squared Investments.
But perhaps the biggest reason behind the slowing growth of ETF managed portfolios may be financial advisors' realization that they can't just "throw assets over the fence" to ETF strategists.
Acting as a fiduciary, the client's advisor must conduct thorough due diligence on ETF strategists and their strategies, and then continue to monitor portfolio performance and regulatory/compliance issues. It's a difficult job that demands time, documentation, and adequate compensation.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
