Nice article by Jackie Noblett of Ignites, highlighting the successful trend toward wrapping strategies in an ETF—a trend which Dorsey Wright is leading.
While funds of funds have their niche in the mutual fund marketplace, ETFs allocating to other exchange-traded products have struggled to catch on with advisors who pride themselves in their ability to build low-cost and efficient ETF portfolios.
But ETF sponsors say advisors are starting to pay more attention to ETFs of ETFs with embedded asset allocation strategies for parts of their practices where the efficiencies of buying a single stock outweigh additional management fees.
“Advisors could go out and do a similar thing [to the ETF] but then they are incurring turnover costs, commissions and may not be able to track the strategy as well, so the management fee overlay [of an ETF of ETFs] is very reasonable,” says Jeff Beeson, product development manager at Invesco PowerShares.
PowerShares is among the firms looking to tap into demand for products with prepackaged allocations. Both it and First Trust launched ETFs this month that invest in a portfolio of their own products based on research methodologies developed by Dorsey, Wright & Associates.
State Street Global Advisors, meanwhile, has filed registration statements to add the SPDR SSGA Flexible Allocation ETF and SPDR SSGA U.S. Sector Rotation ETF to its line of actively managed asset allocation ETFs of ETFs launched in 2012.
Most of these products remain relatively small compared with funds of mutual funds and separately managed accounts composed primarily or exclusively of ETFs.
iShares launched a range of asset allocation ETFs in 2008, and rebranded them under its core series.
The four funds totaled just under $1.8 billion at the end of February, according to Morningstar. State Street launched the actively managed SPDR SSGA Global Allocation ETF, SPDR SSGA Income Allocation ETF and SPDR SSGA Multi-Asset Real Return ETF in 2012, but combined those products hold about $237 million in assets.
A handful of such products have had greater success in gathering assets, however. The $3.4 billion Dorsey Wright Focus 5 Fund is among the largest asset allocation ETFs of ETFs, and critical to its success is the “intellectual capital and following” that comes with partnership with the Richmond, Va.-based research and model shop, says Ryan Issakainen, senior VP at First Trust.
First Trust has worked with Dorsey on building other models that allocate among the Wheaton, Ill.-based sponsor’s ETFs, but offering the strategy in a stand-alone ETF provides another way for advisors to access the research and models.
“Dorsey Wright has demonstrated expertise in helping advisors use ETFs in portfolio construction, either in sector rotation or some other kind of model, and there were already a number of financial advisors that had significant buy-in to the strategies,” Issakainen says.
Similarly, PowerShares sees significant value in the Dorsey name. In the case of the DWA Multi-Asset Income Portfolio, it is the first time the research shop has put together a product using a multi-asset income-focused model, Beeson notes. The firm is positioning the product as a way for advisors to enhance income generation without having to “reach” into asset classes they may be unfamiliar with, such as master limited partnerships, he adds.
Advisors also benefit from the efficiencies that come with the fund-of-funds model, particularly for more tactical strategies, sponsors and analysts say. Investors often incur trade commissions and bid-ask spread costs in buying and selling ETFs on an exchange, which can add up when tracking a portfolio of many ETFs that rebalance frequently. Those trades can also have tax consequences, but an ETF can use in-kind creation and redemption to reduce the capital gains hit.
While some ETF-using advisors believe part of their value to clients is in evaluating the broad array of ETFs and using them as building blocks for custom portfolios, there are a growing number of investors new to ETFs who are looking for “simple solutions” that increasingly include ETFs of ETFs, says Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ. “They are gaining attention because they are doing the work for the investor or advisor in terms of sorting through the universe of ETFs based on whatever characteristics or outcome they are looking for.”
By comparison, more than $73 billion was held in ETF managed portfolios tracked by Morningstar at the end of 2015. But the ETF managed account business has shrunk nearly 30% from its peak of $103 billion at the beginning of 2014, in part due to poor performance and in part because of reverberations from the collapse of F-Squared Investments and management turnover at Windhaven — two of the biggest ETF strategists.
ETF sponsors have spent years forging close ties with this market, but also supplementing their efforts to help advisors put together ETF asset allocation strategies with paper models and individual ETFs. “We see utility in a lot of different mechanisms for asset allocation,” says Dave Mazza, head of research for SPDR ETFs and SSgA Funds.
“There’s going to be a group of clients out there that are not going to be interested in a one-stop-shopping solution for their client portfolios. But that doesn’t turn them off from being engaged with the [asset allocation] products,” either as a tool for smaller accounts or within a sleeve of a portfolio that mixes various asset allocation strategy funds with an advisor’s choice of ETFs or other products to serve as core holdings, he says.