WA MAGAZINE JanFeb PDF A - Flipbook - Page 12
ETF INNOVATORS
CONTINUED FROM PAGE 11
managers are introducing retail investors
to techniques that were once reserved for
hedge funds and other institutions.
And that’s just on the equity-oriented
side. Layer the right derivatives into the
portfolio, and you can generate bond-like
current income, which is handy when the
yield curve is disordered and cash rates
are going down.
Or simply take a smarter approach
to bonds than the market-weight funds.
Everyone I talk to kicks the “Agg,” or the
Aggregate U.S. Bond index. It simply
doesn’t work in this environment.
Of course, bond ETFs have a long way
to go to catch up to stocks. So do commodities, derivatives, and pure crypto.
Tech advancements have been instrumental in this growth, enhancing trading
infrastructure, improving tax efficiency,
and enabling sophisticated strategies.
These innovations have supported
active management approaches and
bolstered the appeal of ETFs to a
broader audience. For financial advisors,
the boom presents both opportunities
and challenges, enabling more tailored
portfolio construction but demanding
greater expertise and due diligence.
You have to pay attention. If you’ve
been content to passively screen new
funds just to satisfy research requirements, it’s time to take a step back and
see how this generation of investment
products behaves differently from the
old stuff that crowds the database.
Then, when you see something that
works, passively flagging it for future
reference isn’t enough. Clients who
stuck with you through the storms don’t
want to go back there. If something is
available now that’s better in one way or
another, they want it in their portfolio.
It’s okay if nothing fits that description. But your clients need to know that
too. Maybe they see it differently. Maybe
they want another way. That’s something
you need to know.
FRESH IDEA 1:
A SMOOTHER GLIDE
How do you escape the pull of the core
equity benchmarks and the random index
walk? One approach is obvious in hindsight: replace the stocks with a basket of
12 | JAN/FEB 2025
options to shift the range of future outcomes up or down that efficient frontier.
Filling the basket and rolling the
contracts is complicated stuff, which
is why this modified core strategy was
COMMANDING
HEIGHTS
AS CHIEF BUSINESS officer at State
Street Global Advisors (easily $1.5 trillion in ETF AUM and counting), Anna
Paglia sees all. And she’s got clear recommendations for advisors looking to
pick a fund, even if it’s not one of hers.
New US ETFs launched at a
record pace in 2024, averaging 50
each month. And with each new fund
comes a responsibility to ensure it
provides the exposure investors want
at the right cost.
At the same time, more ETFs can
make due diligence more daunting. I
always suggest advisors start with a
single investor-focused question: What
are you trying to achieve—growth,
income, or risk management?
Getting crystal clear about the
outcome you want then allows you to
screen for the fund attributes that can
best help you achieve that outcome.
If it’s risk management, for example,
you’d look closely at correlations.
As advisors evaluate the ETF’s
profile—from the firm’s reputation to
the ETF’s cost, liquidity, and tax efficiency—I’d encourage them to lean on
existing tools or frameworks that can
help with their selection. They don’t
have to go it alone. For example,
among other resources, we offer
an ETF Due Diligence Checklist.
And our State Street SPDR ETF
Strategy team is always available to consult. They can help
determine if the ETF is exactly
the exposure the
advisor is looking
for and, more importantly, how
well it fits into
the client’s
portfolio.
once restricted to private bank clients and institutional investors. Now,
however, a few asset management firms
have packaged the proposition into
exchange-traded products.
These funds can be a great solution
for clients who intellectually admit that
they need to stay in the equity market
but simply lack the emotional reserves to
contemplate even a temporary shock like
what we saw in the COVID-19 meltdown
of 2020. The options are stacked to create
a hard floor on potential drawdowns:
your clients will never lose more in any
given period than the amount they indicated they’re comfortable losing.
That’s it. Naturally, there’s a tradeoff because the upside capture is
capped to compensate, but very few truly risk-averse investors are focused on
squeezing every percentage point they
can when the market is running hot.
They’ll settle for a reasonable return in
the good times and then feel great when
the drawdown threshold kicks in.
The S&P 500 itself doesn’t change.
The random walk continues. But you’ve
given your clients a slice of that overall
market cycle that better conforms to
their preferences. You’ve actually made
them happier.
What I love about this is how the buffer replaces the contribution the fixed income allocation makes to a classic 60/40
portfolio. Bonds smooth out volatility on
the equity side. The buffer does that.
And bonds provide a little consistent
income independent of market conditions. Because these funds capture signiftha covered too.
icant equity upside, that’s
tw funds (or better,
Where once two
a core equity fund and a selecw
tion of individual bonds) were
y now only need
required, you
ne core.
one. That’s the new
FRESH IDEA 2:
ENHANCED INDEX
Of course, other managers
dev
have developed
different
approaches to
strengthening the
core allocation. A
lot of the cuttingedge managers I
talked to are highly
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