ETF model portfolios may offer financial advisors the targeted outcomes that their investor clients desire and data confirm the model portfolio is expanding rapidly.
“Third-party model portfolios are on the rise—more than 400 have been launched since 2018, according to Morningstar’s 2020 Model Portfolio Landscape writes Morningstar analyst Jason Kephart in a recent note.
Financial advisors have utilized ETF model portfolios to help streamline their practices and provide them more time to interact with their clients.
A prime example of a well-constructed 60/40 model portfolio is the moderate allocation portfolio within the Strategic Model Portfolios series offered by WisdomTree Investments.
“This model portfolio is designed for investors with mid- to long-range time horizons who are willing to tolerate short-term price fluctuations,” according to WisdomTree. “The model portfolio seeks to balance the growth of capital through domestic and international equity ETFs, with potentially volatility-reducing fixed-income ETFs that also serve as a source of current income. The model portfolio strives to deliver performance in excess of a 60/40 combination of a broad-based global equity benchmark and a U.S. aggregate bond index.”
Getting Strategic
ETF managed portfolios are investment strategies that hold more than 50% of assets invested in ETFs and represented one of the fastest-growing segments in the separate accounts space. Specifically, ETF managed portfolios typically offer three major investment themes: tactical, strategic, and hybrid mix.
In the case of WisdomTree’s moderate allocation portfolio, the lineup is comprised of a mix of the issuer’s own products as well as ETFs from other sponsors. On the equity side, the portfolio features equity exposure spanning domestic large-, mid- and small-cap stocks as international exposure. Its fixed income roster spans durations and credit qualities and includes domestic and international bonds.
One of the equity holdings in the portfolio is the WisdomTree Earnings 500 Fund (EPS ), a smart beta alternative to cap-weighted domestic large-cap equity strategies.
EPS targets an earnings-weighted index that screen for positive cumulative earnings over their most recent four fiscal quarter period and assigns weights to components to reflect the proportionate share of the aggregate learning’s each company generated, so those with greater earnings have larger weights. That gives the fund value and quality tilts.
Another reason for advisors to embrace model portfolios are favorable fees.
“Low costs remain one of the most appealing features of model portfolios—even the highest-cost models are substantially cheaper than the mutual funds with the lowest fees,” according to Morningstar.
Indeed, the bulk of the funds in WisdomTree’s moderate allocation portfolio are cost-effective if not downright cheap.
