Mike Woods, CEO of New York-based XTF Advisors, wants his fledgling firm to become as integral to the retail exchange-traded industry as the ETFs themselves. He's in the midst of building an empire that encompasses ETF-oriented investor services ranging from ma naged ETF portfolios to a full-blown ETF rating service. Even mutual funds of ETFs are on the near term horizon.
He recently took time to visit with Research to share his thoughts on why the clutter of new ETFs bodes well for business by increasing the need for good advice.
Research: Building and managing portfolios is something a lot of financial advisors pride themselves on. How does XTF overcome the perception that it's competing with advisors with its ETF portfolios?
Woods: We're assisting financial advisors to take the portfolios to the next generation of asset management, which is the tactical or dynamic allocation changes of the portfolio above and beyond the strategic side. We start with the strategic and then go to tactical. Our portfolios are a quantitative/tactical model based upon econometric signals — both past and leading indicators, as well as relative value. We also look at risk metrics (from both a domestic and global viewpoint) and market conviction and momentum. The quantitative side is not what financial advisors typically look at. Instead, advisors tend to be focused on the strategic aspects of portfolios based upon the proper allocation for the risk tolerance of their individual clients. We want to help financial advisors to free up their time to focus on raising more assets.
How does the ballooning number of ETFs play into this?
The proliferation of ETFs is creating a need not just for advice, but for education. Not every ETF is structured the same way, even in the same asset classes. There are numerous differences in terms of fees, pricing, how funds are managed, how funds are manufactured, how they manage cash, the bid/ask spread and beyond. Each of these factors can help to determine which is the best ETF to buy.
One of the big debates in the ETF industry is about what constitutes the best method for assembling an index. Is it traditional market cap-weighted indexes, equal weight or fundamental indexing?
We differentiate ETFs according to their different investment objectives. While we're looking at the fundamental and equal-weighted indexes, right now we use primarily capitalization-weighted indices for our core portfolios. In some of the country-specific ETFs and models we've assembled, we're currently looking at equal-weighted indexes.
The elevated fees and lack of trading volume for fundamentally-weighted ETFs makes them prohibitive at this particular point. However, we do believe it's a very interesting development and we think as these products are allowed to mature, they may become a more suitable option for some of our investment portfolios in the future.
Target maturity portfolios have been a huge success in the mutual fund world. What does XTF offer in this regard? And why would target-maturity ETF portfolios be better than what's currently available?
We now have six target date portfolios as an SMA structure from 2005 to 2030, with five-year increments between each. With each year that gets closer to age 65, equity exposure is reduced while fixed income increases. Also, tactically, during the year, we dynamically change the portfolio per our tactical models where we adjust the asset classes. This is a contrast to other tactical models, which are strategic. For example, at the beginning of the year, they assume a fixed percentage of an individual's portfolio should be allocated to equities and when an age change happens a new percentage allocation is recommended. We're taking this a step further because the benefits of ETFs allow us to dial into the asset classes without any variance or style drift.
