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ETF managed portfolios hit the skids

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Few new investment concepts have soared onto the scene faster than exchange-traded funds managed portfolios, which increased assets under management (AUM) from $27 billion in 2011 to more than $100 billion in mid-2014, according to Morningstar.

These products, which are predominantly advisor-driven, combine the popularity and trading efficiencies of ETFs with actively managed investment strategies, within a separate account structure.

During the bull market of 2011-2014, investors flocked to the hottest-performing, fastest-growing ETF managed portfolios.

Now, they’ve hit the skids. Halfway through 2015, Morningstar reported that total ETF managed portfolio AUM had fallen to $80 billion.

Over the last year, AUM imploded at two former high-flying companies in this space: 

  • F-Squared Investments, Inc., which a year ago commanded a quarter of the genre’s assets, faced regulatory sanctions, went bankrupt, and lost 86 percent of its AUM in a year. 

  • Good Harbor Financial, LLC, suffered from poor performance and lost 83 percent of its AUM in a year.

Two other large managers, Windhaven Investment Management and Stadion Money Management, LLC, lost more than 20 percent of AUM.

In short: The hot money that was so quick to flow into the genre’s star performers was just as quick to jump ship at the first sign of disappointment.

Now, ETF managed portfolios are in cannibalization mode, with other companies fighting to gather assets fleeing the fallen high-flyers.

ETF managed portfolios generally aren’t customized for each investor’s objectives. With active trading of ETFs, they aren’t always tax-efficient when held in taxable accounts, and with program advisory fees stacked on top of ETF management fees and brokerage costs, they aren’t so cheap to own.

So, what’s the attraction? Until recently, the answer has been performance.

Unfortunately, many advisors oversold the potential of ETF managed accounts to deliver superior performance over full market cycles.

In the bull market phase, some strategies performed well and grew AUM at a torrid pace. But the stock market began to cool just as they reached gargantuan asset size.

Performance expectations were too high and disappointed investors left in a hurry.

Very few ETF managed portfolios have been around long enough to produce a documented track record over a full market cycle, including bear markets like 2000-01 and 2008-09.

The second half of 2015 may be a proving ground for which of these strategies can protect assets in a down market.

Although this genre has entered a period of consolidation and perhaps survival for some participants, it can be a glass half-full for advisors. Many have learned a lesson about the risks of chasing hot trends before having full-cycle performance results to evaluate.

Advisors also should see that size isn’t necessarily an advantage in this space.

According to Morningstar, of the 10 ETF managed portfolios that returned the best three-year performance for the period ending 6/30/15, not one currently has more than $200 million in AUM.