Model ETF portfolios get attention from Barclays

As exchange traded funds gain in popularity, more financial advisers are building model ETF portfolios for use by other advisers. It is a trend being driven by advisers who "define their value proposition as selecting great managers," said Susan Thompson, managing director of iShares ETF Business at Barclays Global Investors of San Francisco. The development is still in its infancy, she said. But the potential is huge. Model ETF portfolios have already attracted somewhere around $1 billion in assets, Ms. Thompson estimated. For example, the majority of advisers (75%) invested in ETFs, and half planned to invest more in the next six months, according to a survey of adviser attitudes released March 5 by Schwab Institutional, a unit of The Charles Schwab Corp. of San Francisco. But despite the high rate, just 23% were using what the survey described as ETF wrap products, which is another term for model ETF portfolios, Ms. Thompson said.

NEW EDITION

That number demonstrates room for growth, she said, and it is why Barclays last week released an updated version of a guide to model ETF portfolios, the only such guide of its kind. Barclays originally released the guide last year but didn't start publicizing it until this latest edition to ensure that the kinks had been worked out, Ms. Thompson said. The new guide includes a list of 33 advisers who offer model ETF portfolios, and the performance of those portfolios. The guide will be released on a quarterly basis, Ms. Thompson said. As more advisers who are running model ETF portfolios are discovered, they will be added to the guide, she said. Barclays does "minimal" due diligence, Ms. Thompson said. The only criterion for inclusion in the guide is that 75% of a portfolio be in ETFs, excluding cash, she said. The guide seeks to provide information on as many such portfolios as possible, regardless of whether the portfolios contain iShares or other ETFs, Ms. Thompson said. Advisers of all stripes said they like the idea of a guide to model ETF portfolios. "There is such a proliferation of ETFs, most advisers are fairly deep underwater as to what they are or how to use them," said Jim Lowell, the Needham, Mass.-based editor of Forbes ETF Advisor, a monthly newsletter. A quick reference guide serves a couple of purposes, said Mr. Lowell, who is also a partner and chief investment strategist of Adviser Investment Management Inc., a Newton, Mass., firm with about $1 billion under management that is listed in the new guide.

SEEING POTENTIAL

For one thing, such a guide educates advisers, he said. And for Barclays, it helps solidify the company as the No. 1 ETF source for advisers, Mr. Lowell added. Barclays, however, isn't the only provider that sees potential in model ETF portfolios. Claymore Securities of Lisle, Ill., reached out to ETF Portfolio Solutions Inc. of Leawood, Kan., offering it information about regional broker-dealers that might be interested in offering its ETF portfolios, said ETF Portfolio Solutions president Richard Romey. ETF Portfolio Solutions, which has about $40 million in assets, doesn't use Claymore's ETFs, but its help in opening up platforms was much appreciated, he said. Mench Financial Inc. of Cincinnati runs various ETF-only separately managed accounts, one of which, the Global Sector Enhanced portfolio, has a track record that dates back to 1996. Interest in such portfolios is increasing, said Tom Mench, chairman and chief investment officer of Mench Financial, which has about $140 million under management. And Barclays' development of a guide to such portfolios — in which his firm is included — is an example of that interest, he said. The proliferation of such portfolios was inevitable, Mr. Mench said. When ETFs were introduced in the mid-1990s, it was hard to put together ETF-only portfolios, because they hadn't yet been developed to cover a wide variety of asset classes, he said. Now there are hundreds of ETFs, making the development of a diversified portfolio easier, Mr. Mench said. Also, the barriers to creating model ETF portfolios are low, he said. "I always knew it was going to expand," Mr. Mench said of the interest in such investments. E-mail David Hoffman at dhoffman@investmentnews.com.