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Portfolio > Portfolio Construction

How ETF Portfolios Are Like Fantasy Football

By Noah Hamman

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Autumn marks the beginning of new events and endeavors: a different school year, fall foliage, football season, and evaluating and positioning your client portfolios for the year’s final quarter. As analogies go, the latter two can go hand in hand. For advisors and football fans alike, managing clients’ money is quite similar to building and managing a fantasy football team.

A complete fantasy football team will have exposure to all the skill positions — quarterback, running back and receiver — as well as careful consideration in selecting a defense and special teams. Similarly, a diversified portfolio that utilizes ETFs will have an offense of long equities and bonds; a defense of cash, short and hedged strategies; and special teams of tactical, commodities and currencies.

The ultimate goal is to always put the best-suited players on the field correspondent to the playing conditions — not just the best players, but a diverse group. A football game cannot be won with all running backs or only kickers. As I have previously discussed in this column, the best place for the advisor is as the coach, not the player. The key for being the best coach is to evaluate the players, get them in the right positions, keep an eye on up-and-coming rookies and make the tough decisions about who starts and who sits. Do not think that the coach’s role is easy — it comes with all the responsibilities while the players get all the glory.

A Barron’s fixed income roundtable in August noted that investing for income has never been harder. Unless an advisor possesses deep credit analysis capabilities, how can one effectively navigate an interest rate environment that no investor alive has ever seen? The answer is by being a great coach and building a great team. Thankfully today, it is easy for an advisor to pick up DoubleLine Capital, Pacific Asset Management or Blackstone as some of the most skilled players in the fixed income space. Again, a diverse team with diverse skills is key, and it is not likely that one player always gets it exactly right.

Do not forget about special teams in this area either. Alternative income and negative duration strategies can provide additional support if the market environment does not pan out as planned. Again, this is where the coach’s role is difficult. Clients need to know the type of team an advisor builds, which includes the plan to start or sit certain players.

The ETF space possesses an increasing amount of offerings, and while some tickers may be more prominent than others, it remains imperative to know what resides underneath each strategy’s hood. Transparency is key and will help illustrate if a player is sticking to their approach or making last minute changes to adapt to the competition. Actively managed ETFs can deliver access to top portfolio managers who use their discretion and expertise to seek alpha and better risk-adjusted returns. Due diligence combined with complementing different approaches could yield a similar outcome of a star running back led by an all-pro offensive line, or the breakout rookie receiver who leads the league in caught passes.

The best coaches understand that one cannot be both the player and the coach and still have an effective team. Just being the coach is not an easy endeavor. It is a continuous job with the responsibility of making active investment decisions while rotating exposure according to market conditions. Like a good fantasy football manager, and similar to how top institutions manage money, an advisor as the head coach who selects players among a deep and talented bench across different strategies, managers and investment styles provides their clients with the best opportunity to win the game.

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