As the boom in the number of exchange-traded funds (ETFs) and exchange-traded notes (ETNs) continues, another related boom is happening: model portfolios that utilize these popular investment choices.
To that end, Ibbotson Associates and ING Financial are teaming up to create a family of active ETF model portfolios. The portfolios will dynamically change their asset allocation based upon momentum factors.
In addition, Ibbotson is developing a set of tax-sensitive model portfolios that are optimized to produce low tax liabilities for investors. All of the portfolios are designed for use by financial advisors within ING Financial Advisers, a registered investment advisor.
“The ING Momentum ETF Strategy program is a unique approach combining investment techniques and utilizing low-cost ETFs in a way that brings value to our clients. Combining the expertise of ING and Ibbotson will allow our representatives to present innovative financial solutions that address our clients’ financial needs in many different areas,” said Ronald Barhorst, president of ING Financial Advisers. “We have found that higher-net-worth investors who understand equities are seeking exposure to more market segments and asset classes for their retirement and longer-term portfolios. The use of ETFs with broader asset allocations is a potential solution to provide greater market exposure.”
The active ETF portfolios will range from aggressive to conservative investment strategies.
Ibbotson ranks the asset classes in the active ETF portfolio based on performance. The top asset classes are overweighted while the bottom asset classes are underweighted to try to capture the momentum effect in the stock market. The portfolio comprises 20 asset classes, including traditional domestic and international equity and fixed-income as well as domestic and international real estate investment trusts, listed private equity, emerging market bonds, small-cap international equity, commodities, Treasury inflation-protected securities, and high-yield bonds.
“A large body of academic work suggests that asset returns have some degree of predictability. Our dynamic momentum methodology used in these active ETF portfolios is designed to take advantage of this market behavior,” said Peng Chen, president of Ibbotson Associates.
For the ING Wealth Management Tax Sensitive Strategy, Ibbotson constructs the asset allocation policy and selects funds, taking into consideration the tax implications for investors. Ibbotson first develops after-tax capital market assumptions for each asset class to construct the asset allocation policy. Ibbotson then selects the funds according to its proprietary tax-efficiency measure.
“We can’t control the gyrations of the market, but we can create portfolios that are diversified and tax efficient to help investors achieve more stable performance and keep more of the returns,” Chen added.
One area of concern to investors is the effect of taxes on portfolio earnings. “With Ibbotson’s assistance we have also developed an investment advisory program that seeks to minimize the tax effect on a portfolio while taking appropriate levels of risk to maximize a portfolio’s return. We are excited about these programs and the solutions we can bring to our clients,” Barhorst added.
Ibbotson provides investment analysis and fund selection and monitoring services for the ING Wealth Management discretionary investment advisory program. Ibbotson is also a consultant to the ING VA Lifestyle Golden Select Program. The company is a registered investment advisor and wholly owned subsidiary of Morningstar (MORN).
Ron DeLegge is the San Diego-based editor of www.etfguide.com.