It is paramount that advisors set client and their own expectations properly when allocating to ETF Portfolio Strategies. The appeal of many ETF Portfolio Strategies is their ability to participate up and protect down. HOW strategies accomplish this is very important, yet can be very different. How a strategy protects down is important to understand since hedging a portfolio can add to the “cost” of the strategy. Tactical strategies are prone to whipsaws, and the cost for being tactical is created when a strategy experiences the initial loss, trades out, and then misses the rebound. To offset the potential “costs” of whipsaws, SOME strategies attempt to use leverage to increase the upside capture during longer up trends, and to essentially create a “performance reserve” to offset whipsaws events during short corrections, or trend-less markets. Another hidden cost to tactical strategies are taxes. Excessive trading can create unnecessary short-term capital gains when owned in non-qualified accounts. Balancing the benefits of diversification with the need to be tactical can yield better risk-adjusted, after tax returns for many advisors and their clients.
Warning to Advisors: Set Proper Expectations!!! Have a deeper understanding of the what a ETF Portfolio Strategy can and cannot do, and the types of market environments when a strategy will perform and under-perform. This is just as important in the due diligence process and rests squarely on the shoulders of the ETF Strategist and their ability to communicate the benefits and risks with the advisor.
The Perils of Managed Portfolios (online.barrons.com)
Financial advisors’ use of ETF specialists can provide both benefits and problems. The trouble at Good Harbor Financial and F-Squared Investments.
Managed Volatility Blog 