We proudly present Research magazine’s third-annual ETF Hall of Fame. Welcome!
There’s no question that exchange-traded funds are revolutionizing the investment world. Their proliferation is unstoppable, their power indisputable; often they’re unbeatable.
The practitioners we honor this year — financial advisors with two wirehouses and one money management firm — are so committed to ETFs that these funds have become essential to their investment strategies.
Though there is a whopping $9.69 trillion invested in mutual funds vs. $540 billion in ETFs, the latter funds are an increasingly popular product providing the best solution in a broad range of investing scenarios.
The first ETF was introduced on United States stock exchanges in 1993. Now there are 744 funds. Of these, 15 are actively managed and attempt to beat the market in contrast to the bulk of ETFs, which passively follow traditional indexes. Actively managed funds are a controversial concept; and while several new ones are set to debut, widespread use remains to be seen.
Clients understand ETFs best for their transparency, tax efficiency and low costs. But with increasing education by FAs, consumers are starting to appreciate ETFs’ value in asset allocation and investing strategy.
Since more and more practitioners are using ETFs in creative ways, it was no easy task for our contest judge, Ronald L. DeLegge, contributor of Research’s monthly ETF Reporter department and publisher-editor of www.etfguide.com, to choose this year’s winners.
Here’s how and why these innovative pioneers are counting on ETFs to build successful, impressive investment portfolios:
The Chudom Hayes Team of Morgan Stanley Smith Barney
Kyle Chudom, senior vice president, wealth advisor, senior portfolio manager
Eric Hayes, vice president, financial advisor, portfolio manager
Advisors since: 1984 (Chudom), 1997 (Hayes)
Home base: Oakbrook, Illinois
ETF AUM: $368 million (of total $500 million)
Community activity: Chudom — hires paid high school and college interns; Hayes — introduces children to flying as a profession through the Experimental Aviation Association.
Clients need to be educated about exchange-traded funds — and Kyle Chudom has found a great way to simplify the process. He uses this analogy: Just as viewing high-definition flat-screen plasma color TV is a far better experience than watching the clunky old black-and-white sets of yore, ETFs are a state-of-the-art tool that lets advisors do a better job of investing than traditional mutual funds and actively managed money.
The approach works well and has helped the eight-member Chudom Hayes Team, with 1,200 accounts invested in the firm’s proprietary ETF models, become MSSB’s largest discretionary managers of ETF portfolios. In fact, ETFs are a cornerstone of their practice.
The group’s transition to ETFs began four years ago. Until then, most portfolios were built using at least four active managers.
But “we kept seeing that one manager would beat the benchmark; another would typically underperform the benchmark by a large percentage; and the other two would be pretty close to the benchmark,” says team founder Chudom, 48, named to Barron’s “2009 Top 1,000 Advisors: State-by-State.”
“Ultimately we decided to spend more time focusing on asset allocation rather than trying to pick the best manager,” he continues. “We place greater priority on asset allocation and seeking to minimize expenses than attempting to outperform indexes through active management of individual stocks or bonds.”
How profitable have ETFs been? “ETFs have helped grow our practice a bit quicker because they help to distinguish and separate us from others,” says Hayes, 36, who joined Chudom in 2000.
The two waited till ETFs had a proven track record, then began converting their practice to ETF portfolios using MSSB’s discretionary fee-based Custom Portfolio program.
Focusing on broad, diversified portfolios, the advisors use both tactical and strategic asset allocation. They may, for example, pick a certain sector to emphasize for a specific time period. ETFs are purchased from large providers with low expenses, such as Vanguard and iShares.
Chudom and Hayes are both native Midwesterners — Chudom, born in Munster, Indiana, Hayes from Lenox, Illinois. By middle school, Chudom had decided to be a financial advisor, having been smitten with the market at age 12. He graduated with a BA from Alma College in 1983 and later completed advanced studies at the Wharton School. In 1984, he joined Dean Witter, a predecessor of MSSB, as an advisor trainee.
Hayes’ interest in investing came early as well. At 14, he was reading telecom industry annual reports his dad brought home from work. He graduated from Southern Illinois University in 1995 and went to work as a financial advisor for a large insurance company. Before linking up with Chudom at Dean Witter, he was an Edward Jones FA.
The partners see the “trading mentality” that’s developing around ETFs as a possible big pitfall. Says Chudom: “We’re concerned that individuals are buying a particular index-based ETF and then selling it in a matter of days, or a couple of months, rather than using it for long-term investing. Some ETFs are being constructed just for [trading]. We hope this fast-money mentality doesn’t tarnish the ETF industry.”
Another matter of concern is buying two ETFs that may seem different, but in fact there is close similarity in the underlying holdings in the indexes they track. Notes Hayes: “That’s one of the things we look at and research very carefully.”
Indeed, ETFs’ transparency is one of the funds’ most appealing advantages: “With ETFs,” says Chudom, “we know exactly what we [have]. With a mutual fund or an active manager, we never knew exactly what was held in the portfolio at the time of purchase.”
Senior vice president-investment officer, King Financial Group of Wells Fargo Advisors
Advisors since: 1994 Home base: Seal Beach, California
ETF and ETN AUM: About $60 million, of that $45 million in ETFs (of total $111.840 million)
Community activity: President, Partners of Parks, Long Beach, California.
Geoffrey King had been a financial advisor for just three years and setting up portfolios using individual stocks, bonds and mutual funds, when he began to seriously question the long-term success of the actively managed investment strategy. Confirming his doubts, he began reading studies showing that year-to-year most active managers underperform their respective benchmark indexes.
So in 1997, King began exploring something new: ETFs. But there were too few funds available to implement a diversified, well allocated portfolio. He would wait two years, when ETFs had expanded dramatically, to begin using the tools as the core holding in his client portfolios.
But hold on: Following a few years of ETF success, King decided to put active management back into the mix.
“The idea was not a case of ‘active vs. passive.’ It was ‘active with passive,’” King, 38, says. Today, the core of his portfolios is invested in passive ETFs diversified among asset classes, with “satellite” actively managed mutual funds employed to complement the indexes.