Are you familiar with ETF managed portfolios? Morningstar defines them as “investment strategies that typically have more than 50% of portfolio assets invested in ETFs.” iShares estimates they could grow to $120 billion in assets by 2015.
ETF managed portfolios are popular with financial advisers because these funds allow advisers to provide institutional quality portfolios for their clients. So, you can expect to hear more about them in the future.
Unfortunately, like wrap accounts, you should also expect to pay handsomely for the service. The Wall Street Journal points out that you could end up paying as many as four fees totaling as much as 2% for the privilege. That defeats the purpose of ETFs. But don’t despair. I have several recommendations that will do the same thing for much less.
Proponents of ETF managed portfolios cite the often-mentioned research that asset allocation is the most important determinant in a portfolio’s total return. It’s hard to argue this fact. However, anyone with reasonable intelligence ought to be able to handle this task themselves. After all, many of these managed portfolios are simply a number of passive index funds.
To pay 2% annually seems wasteful and unproductive. On a $250,000 portfolio you’d pay $5,000 annually. Put it together yourself, and it might cost $2,500 a year — a savings of 50% annually. The debate comes down to whether you feel outsourcing the responsibility is worth $63,000 or more over 25 years. I surely don’t.
Morningstar’s ETF Managed Portfolios Landscape Report from January 2012 highlights the top six firms in this burgeoning field. The biggest company by a wide margin is Windhaven Investment Management with $7.1 billion in assets under management. Using its Diversified Growth Portfolio as a guide, I’ll find three alternatives.
The first is the PowerShares RiverFront Tactical Growth & Income Portfolio (NYSE:PCA), which is based on the RiverFront Global Tactical Balanced Growth & Income Index. The fund tries to meet a risk profile that targets 50% equities and 50% fixed income and is rebalanced monthly.
The fixed-income portion of the portfolio is currently 46.4% with an SEC 30-day yield of 3.01%.The largest holding is the PowerShares Dividend Achievers Portfolio (NYSE:PFM) with a weighting of 12.65%. Its three-year annual return based on market price is 13.49%. At an expense ratio of 0.71%, it’s far more reasonable than Windhaven’s solution. The big argument against the PowerShares solution is that it employs two asset classes compared to four for Windhaven.
The second ETF I’d take a look at is the SPDR SSgA Income Allocation ETF (NYSE:INKM) offered by State Street. The actively managed fund invests in 18 ETFs with an overall goal of generating income. Its top holding is the SPDR S&P Dividend ETF (NYSE:SDY) with a weighting of 18.86%.
In addition to equity and fixed-income funds, it also invests in real estate through the SPDR Dow Jones International Real Estate ETF (NYSE:RWX) as well as the SPDR Dow Jones REIT ETF (NYSE:RWR). With the exception of hard assets such as gold and crude oil, the State Street fund matches up very well to the Windhaven portfolio. And with an expense ratio of 0.70%, it’s a fraction of the cost.
The last of the ETF alternatives to managed portfolios is the iShares Morningstar Multi-Asset Income Index Fund (BATS:IYLD). A little more than two months old, it has a total of 10 ETFs as well as individual stocks, which represent just 5.15% of the portfolio.
This fund has a greater allocation of fixed-income investments compared to the previous two funds at 60.47%. In addition, there’s a small component of real estate at 4.87%. Due to the higher fixed-income allocation, its expense ratio is lower at 0.60%. Income investors will be interested to know that its 30-day SEC yield is 4.68%, higher than either of the other funds. If you’re closer to retirement, this would be a better choice.
As managed portfolios grow in stature, you can be sure that innovative ETF companies will figure out how to provide similar services for less. Only then will consumers truly benefit from the move to ETFs from mutual funds.
As of this writing, Will Ashworth did not own a position in any of the securities named here.
