Thoughts on AM investing in ETFs

Hey, so I'll be interning at a boutique Aasset manager this summer in the Northeast in a non NYc city (Boston, DC, Phili) that bases their investments of macro research and invests in sector etfs and fi etfs (they have fi and sector equity funds). I was wondering what you guys thought about that strategy and the outlook of it vs a traditional fund comprised of individual stocks and fixed income securities? Thx

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Comments (3)

Jun 3, 2021 - 3:01pm

You are describing what is, primarily, an outsourced institutional manager -  it's very normal and smart to utilize ETF's, mutual funds or SMA's with various managers to get exposures. Unless you have dedicated research analysts that cover specific sectors, and companies, it makes very little sense to start picking individual securities. It's far more efficient, and cost effective in most cases, to simply utilize an actively managed product letting the manager do their thing. 

I'm assuming, based on your comments, you are interning at an OCIO or consulting type firm (I could be mistaken - but it sounds like that). It's a model that's exploded in recent years - primarily because it works and is cost effective for the overwhelming majority of institutions. They focus on getting the asset allocation right (which, historically, is a key driver if not the driver of returns within a portfolio) and then focus on picking the best managers/etf's/mutual funds that express their overall views based on the economic backdrop, etc. 

Consider an average institution of, say, $100 million. 70% to equities, 30% to fixed income. For the FI side - at 30 million - it's simply nuts to manage anything resembling a core or core plus strategy owning the underlying - with any chance of outperformance. Far better to allocate to a few different ETF's or mutual funds - plenty out there - to get your exposure to high quality, actively managed products (or hell - just buy a combination of index funds if you really feel like it). Equity side, same deal basically - index most of the portfolio, and then pick a factor or two (maybe it's growth, small caps, etc.) and allocate there. If you start going international, it's an absolute NIGHTMARE to own the underlying across different countries, deal with tax issues, etc. Just not worth it. 

Thus - you end up with portfolios that have less holdings and a manager who is focused on the asset allocation, economic environment and manager selection. Not sure... hopefully that's what you were looking for. 

  • Intern in AM - Other
Jun 3, 2021 - 6:03pm

That actually describes where I'm working at perfectly, a lot better than I did lol, I was wondering what you thought about the the quality in a career in this type of role in regards to the future of the sector of AM compared to traditional am, exit opps, etc. Thx!

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