Morningstar Advisor - December 2012/January 2013 - (Page 41)

ETF Managed Portfolios on the Rise By Andrew Gogerty An emerging market of strategies takes advantage of advisors’ growing interest in funds of funds. While the popularity of exchange-traded funds among financial advisors and other institutional users is no longer a new story, the emerging story of ETF managed portfolios has been little discussed. Their growth illustrates the massive appeal that funds of funds have for advisors in today’s investing environment. Primarily structured as separate accounts, these strategies typically have more than 50% of portfolio assets invested in ETFs and represent one of the fastest-growing segments of the managed-account universe. Professional money managers are packaging portfolios of ETFs into investment strategies to meet a wide array of investor demands. The influx of new individual ETFs provides access to stand-alone investment strategies and one-stop, complete-solution offerings. Morningstar tracks nearly 490 strategies from 120 firms with assets of $50 billion as of June. Assets in this space grew 30% in the first six months of 2012 and 48% since September 2011. These numbers mark a significant increase from the 370 strategies offered by 95 firms that contributed to Morningstar’s database a year earlier. Demand for access to and information on ETF managed portfolios is on the rise, coming from both the firms managing these portfolios and the institutional decision-makers responsible for including them on advisors’ distribution platforms. An Evolution of Money Management The market for ETF managed portfolios is growing for several reasons. Morningstar and academic research have shown that asset allocation is as important as security selection in determining a portfolio’s total return. A prudently constructed portfolio of ETFs provides wide asset-allocation options and low-cost diversification. ETFs provide transparency, intraday liquidity, and portfolio consistency to strategists allocating among various asset classes and subclasses. The fiduciary standard continues to move forward as the baseline philosophy for managing client portfolios. As a result, more fee-based advisors are tilting clients’ portfolios toward lower-cost, broad-based investments, with a focus on asset allocation. In addition, the ETF as a technology platform allows third-party ETF strategists to deliver to advisors institutional-type diversification and portfolio management, allowing advisors to focus on gathering and retaining client assets and managing clients’ overall financial profiles. The New Crop of Asset Managers Largest ETF Managed Portfolios by Assets Name Assets ($Mil) Windhaven Investment Management F-Squared Investments RiverFront Investment Group Innealta Capital Morningstar* Good Harbor Financial Cougar Global Investments LP Sage Advisory Services Forward Management Clark Capital Management Group Quantitative Advantage Data as of June 30, 2012 11,049 7,542 3,146 2,565 2,433 2,320 1,637 1,560 1,213 1,170 1,122 *Morningstar assets include assets of its three wholly-owned subsidiaries Morningstar Associates, LLC, Ibbotson Associates, Inc., and Morningstar Investment Services Inc. other regional broker/dealers. As is the case with many startup ventures, these entrepreneurs were likely lured by the possibility of greater autonomy, a wider potential client base, and the ability to build a distinct brand. Initially, these firms were serving their own clients, but many firms began seeing a growing interest in their investment and asset-allocation strategies from other financial advisors and investment consultants. As a The growing use of ETF managed portfolios has led to changes in how ETF strategist firms are organized and perceived by advisors and institutional decision-makers. Many of these firms were started by financial advisors who broke away from wirehouse operations or 41

Table of Contents for the Digital Edition of Morningstar Advisor - December 2012/January 2013

Morningstar Advisor - December2012/January 2013
Letter From the Editor
What Stands Between Me and Stupid
Why Do You Use Dynamic Funds of Funds?
Serving Clients and Community
How to Pick an ETF Managed Portfolio Strategy
Tactical View of Risk
Investments á la Carte
Investment Briefs
Unbundling ETF Managed Portfolios
Risks Loom Over Telecom Industry
Outsourcing Asset Allocation
ETF Managed Portfolios on the Rise
Age-Based Options Take Over 529 Industry
How the Landscape for Advisors Is Changing
Mark Egan Embraces Volatility
Alpha, Beta, and Now … Gamma
Performance Gaps
Gains in Momentum
Companies Where Management Teams Add Value
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
The Once and Future King

Morningstar Advisor - December 2012/January 2013