Advisers seek guidance on ETFs

Their questions involve how to fit exchange-traded funds into portfolios.
JUN 12, 2018

Financial advisers have one big question for the ETF industry: How the heck do you use these things, anyway? And the question is coming more frequently as smart-beta and multifactor ETFs proliferate. Most advisers are fairly well-versed on basic ETFs — low-cost vehicles that weight their holdings by market capitalization, such as the SPDR S&P 500 ETF Trust (SPY). Smart-beta funds, sometimes called factor funds, add a twist by weighting their holdings according to a stock's earnings growth or relative value, and multifactor funds use a combination of factors. All three types of exchange-traded funds can be difficult for advisers to figure out how to fit into a portfolio. "The questions are beyond, 'What is an ETF?'," said Dan Draper, global head of ETFs at Invesco, which offers frequent seminars for advisers to educate them about smart-beta ETFs and multifactor ETFS. "We get huge rooms full of advisers," Mr. Draper said. "They need to make decisions and figure out how to diversify ETF portfolios." Antonio Picca, head of factor-based strategies at Vanguard, agreed. "These are products that need to be bought, not sold," he said. Unlike basic ETFs, "We believe that multifactor ETFs are a form of active investing, which means there are many choices advisershave to make," Mr. Picca said. "And that means you go through an active due diligence process before you invest." ETF providers are responding to advisers' confusion by pouring money into education about their ETFs, particularly multifactor ETFs. "We had 100 education seminars in the first 100 days after the launch of our multifactor ETFs," Mr. Picca said. Vanguard has also developed an online tool to tell advisers about the factor exposures in their portfolios, and how they can replicate that with multifactor and smart-beta funds — essentially replacing high-cost equity portfolios with low-cost factor ETFs. Invesco has also rolled out analytical tools for advisers, thanks in part to its acquisition of robo-advisor Jemstep in 2016. "We're increasingly offering solutions with a digital component," Mr. Draper said. Invesco offers in-person seminars as well. Many ETF providers think it's the in-person seminars that provide the most benefit to advisers. Charles Schwab Investment Management, for example, provides plenty of online help in the form of white papers and other tools. "Sometimes that's better presented in a small-group setting of a dozen or 20 advisers," said Jon de St. Paer, head of strategy and product at CSIM. "You get a more thorough, deeper conversation — it's like getting from ETF 101 to ETF 201." At Columbia Threadneedle Investments, part of the challenge is explaining the uses of its factor-based ETFs, which are based on strategies its active managers use, and the actively managed funds themselves. "There are many ways you can access what we do along a continuum,' said Marc Zeitoun, head of strategic beta and private client advisory at Columbia Threadneedle. The company's multifactor ETFs offer insight and exposure to its investment methodology and thinking; the active funds provide access to its best ideas in real time.

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