ETF Portfolio

  by Tyler Curtis

by Jesse Anderson, CFA

Exchange Traded Funds (ETFs) are quickly becoming a significant piece in investment portfolios.  As of December 2011, the total assets in ETFs exceeded $1 Trillion.  Like index mutual funds, they track a basket of assets.  Unlike index funds, they can be traded throughout the day and are optionable.  This opens up the possibility to make them an integral part of a Snider Investment Method portfolio.

Their tremendous growth and popularity has given retail investors instant access to sectors, countries, and asset classes that in the past could only be accessed by large institutional funds.  With low expense ratios and passive management styles, these securities also fit well within the core Snider Advisors’ investment philosophies.

Although we are very pleased with the standard Snider Investment Method strategy, we created a managed strategy that only uses ETFs.  We feel this strategy fits well for clients who are slightly more risk averse but still seek portfolio income.  Since ETFs consist of a basket of stocks, the risk of bankruptcy is dramatically reduced.  Historically, we have only experienced a handful of bankruptcies in the Snider Method; however, we’ve found the reduction of this risk has helped certain clients sleep better at night.

Lower risk does come at a cost of income.  We do not expect these portfolios to perform up to the same cash-flow objectives of the normal Snider Method.  But, for investors who may not need to maximize the income from their portfolio, a lower risk strategy could be ideal.

Originally implemented for a small number of clients in 2009, we are thrilled to make this available to all asset management clients.  Although the sample size remains limited, we expect this modification to our normal approach to grow in popularity.  We look forward to the future when we can publish official results for this piece of our managed portfolio.

ETFs were first introduced in the Snider Method for our smaller accounts with only one or two positions.  This eliminated the lack of diversification and the company specific risk that existed.  As more funds have been created and markets became more liquid, we tested the system out with larger accounts.

Unlike the standard Snider Method, the allocation of funds is not as straight forward and well defined.  Screening for just ETFs as well as volatility, liquidity, and suitable investments is difficult.  In the ETF Portfolio we eliminate leveraged, inverse, and actively managed ETFs.  We also stretch the position diversification limits since one security can provide immediate diversification.

Typically, our ETF Portfolios hold a large position in a major index (Ex. Dow Jones, S&P 500, NASDAQ, and others).  This is considered the “core” position.  Sector, industry, or country ETFs round-out the remaining portion of the account. The combination creates a “Core / Satellite” approach to cover a majority of the market as well as add volatility and income.  Once the allocation is made, the standard Snider Method rules apply.  Only positions closing and volatility/liquidity changes create the need for a re-allocation.

We feel this is a great addition to our list of products and services.  Ready to learn more?  Give us a call at 214-446-8533 to see if our managed ETF portfolio is right for you.

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