Kevin Ellman, chief executive of Wealth Preservation Solutions in Ridgewood, N.J., began using exchange-traded funds in its portfolios some 10 years ago, after he had become disenchanted with active money managers. "I find that it's very difficult to pick mutual funds that consistently meet or beat their appropriate benchmarks. And I found myself spending a lot of time trying to justify–why did we select this mutual fund if you can just invest in an index and get better or comparable performance at a lower expense? It's a pretty compelling argument, so I decided to begin using index strategies for the core portfolio."
Now, Ellman uses ETFs almost exclusively for clients' equity portfolios and many parts of its fixed-income portfolios. He has gotten no pushback from clients, Ellman says, because many of them have also become disillusioned with active money managers for the same reasons. The firm, which specializes in asset management, estate planning and business succession planning, caters primarily to business owners in the Tri-State Area.
Core and satellite
WPS's core portfolio always has the same elements, including small-, mid- and large-cap stocks, both value and growth, as well as developed international and emerging market international stocks. Some components of the core portfolio may be overweighted in order to achieve extra performance, says Ellman. "We're trying to add value by over- and underweighting certain sectors and certain countries rather than trying to pick stocks." At present, he says, "we are overweighting mid- and small-cap stocks because a lot of research shows that coming out of a recession, mid- and small-caps will outperform large-cap stocks, and we've slightly overweighted emerging markets because, again, research shows emerging markets often outperform coming out of a recession. And that has held true."
In addition, the firm deploys a satellite "defensive" portfolio around the core, also using ETFs, says Ellman. "In there right now, we are basically betting on inflation, for all the fairly obvious and well-documented reasons: There's a tremendous amount of money being printed, we're going to have a lot of deficit spending, we think that ultimately long-term interest rates will creep back up, we think there's a lot of danger the dollar may decline in value. As an inflation hedge, we've shorted the dollar, we've shorted long-term Treasuries and we're long gold." The portfolio was also short the S&P 500 for a time and made some money, he says. "We're trying to add value here by making some strategic investment decisions as opposed to picking specific stocks or making specific security investments."
Ellman says WPS still uses one mutual fund in individual municipal bond portfolios, the Templeton Global Bond fund. "That's one sector in which I haven't found a suitable ETF alternative yet. So if the account is large enough to justify using a manager, that's our first choice for bonds, and if the account is not large enough, then we use ETFs."
