Active managers have found a way to make exchange-traded funds—in the form of so-called ETF strategist funds—their friends.
ETF strategists are active managers who design their own asset allocation models but have to make their market bets with at least 50 percent of holdings in ETFs, according to Morningstar's widely accepted definition. They are the only investment products growing faster than ETFs themselves. As of year-end, about $100 billion had poured into this sector.
But are these ETF funds of funds a good development for retail investors?
An increasing number of affluent investors are gravitating to these portfolios as a method of protecting against downside risk while banking on the ETF strategist's ability to find upside in the market on a more selective basis. There are now enough ETFs to gain exposure to everything from Thai bonds to copper.
Institutional investors, including foundations and pension funds, are taking a serious look at them, too. "We hear from our strategist clients that they have been getting mandates from pensions," said Katharine Earhart, director of BlackRock's iShares Connect program, which works with the ETF strategists.
Once something becomes popular among affluent investors and pensions, a run for the run-of-the-mill retail investor is usually next. But with any trendy investment, there are risks—and ETF strategist funds are no exception. In fact, there are some classic investing red flags that should be applied to ETF strategist funds before a financial advisor tries to sell you on one.