How ETF strategists are employing strategic beta in model portfolios

2018-10-30T10:16:16-06:00October 2nd, 2018|

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Key takeaways

  • ETF strategists are increasingly using strategic beta ETFs in their portfolio models.

  • From long-term strategic allocations to tactical tilts, strategic beta ETFs are often used as a substitute for market-cap-weighted allocations and as a vehicle for emphasizing specific sectors at certain points in the economic cycle.

  • Strategists using John Hancock Multifactor ETFs are drawn to their efficient structure and time-tested factor composition, which was pioneered by Dimensional Fund Advisors.

Executive summary

The proliferation of exchange-traded funds (ETFs) in recent years has offered financial advisors new tools for gaining more precise asset class exposure while also managing overall portfolio cost. Strategic, or smart, beta, with its potential to outperform market-cap-weighted indexes, has become one of the fastest-growing segments of the ETF market. Morningstar reported a 23% increase in strategic beta products in the 12-month period ended June 30, 2016, the fastest recorded pace of new product launches for the category.1 With the variety of choices expanding at such a rapid pace, many advisors are naturally looking to ETF strategists for guidance on ways to implement strategic beta into their client portfolios. This paper includes profiles of four such strategists that are employing strategic beta ETFs in different ways, along with our views on each approach.

One noticeable shift taking place within the model portfolios is the growth of strategic beta strategies.

ETF Strategist Case StudyJohn Bryson, John Hancock Investments


Using strategic beta as another tool for mitigating risk

Investor profile

  • Founded in 2003
  • Headquartered in Denver, Colorado
  • $920 million in assets under management
  • Specializes in outcome-oriented investment strategies with an emphasis on mitigating risk
  • Company website:

Investment approach

The Institute for Wealth Management, LLC (the Institute) was founded to help provide investors and advisors with better access to risk-managed investment solutions. Today, the company tailors the models it uses for each portfolio, which fit into broad-based investment goals—portfolios with downside protection or guaranteed income provided by an unaffiliated insurance company.

Why strategic beta?

For the Institute, using active and passive investment strategies isn’t an either/or proposition. Many portfolios they design incorporate both, or may employ one over the other depending on prevailing market conditions. One of the biggest draws of strategic beta is the alternative it offers to capitalization-weighted investments—generally, one of the hallmark characteristics of many purely passive approaches. “We may be interested in broad exposure to a particular market or sector,” says Chief Executive Officer Matt Medeiros, “but we don’t necessarily want the inherent bias toward the largest securities that’s embedded in most passive ETFs. Strategic beta approaches help us to be more targeted in how we’re achieving our exposures.”

Specific to the Institute’s sector rotation strategy, the company found a factor-based, strategic beta approach particularly appealing. Their strategy makes monthly allocations to stock market sectors, overweighting and underweighting different sectors based on a variety of price-, valuation-, and momentum-based metrics. The suite of John Hancock Multifactor ETFs offers the strategy another potential source of alpha through its tilt toward smaller-capitalization, lower relative price, higher profitability companies. “John Hancock Multifactor ETFs come with a built-in bias toward those factors that are proven sources of excess returns over time, and that was a natural complement to the work we were already doing,” said Head of Capital Markets Jeff Pietsch, JD, CFA.

A research-driven approach

Given the Institute’s focus on risk mitigation, it’s no surprise that research is the cornerstone of their investment process. The company seeks input from a wide variety of sources, from investment banks to central bankers to third-party capital market teams, all of which they combine with their own in-house fundamental analysis and the macro views of their own veteran economist—in many ways, the same kind of vetting and research John Hancock Investments performed before selecting Dimensional Fund Advisors to design the ETFs’ underlying indexes. “Beyond the data that supports Dimensional’s investment approach—which is compelling in its own right— the research and oversight John Hancock Investments provides are also attractive,” said Portfolio Manager Brian Rettig, CFA. “It’s another layer of due diligence, and it reinforces the work we do for our own clients.”

John Hancock Investments’ view

  •  Risk management is an often overlooked pillar of investing in general; in today’s market environment, with few attractive valuations across a range of asset classes, managing downside risk may be even more important.
  • Purely passive approaches can offer cheap and liquid exposure to many asset classes, but the inherent tilt toward the largest — and therefore most expensive— securities may not be the right approach for all investors; the Institute’s management of capitalization risk aims to be more prudent.
  • ƒƒ Many of the Institute’s strategies make significant use of cash as a volatility dampener in turbulent or overbought markets, which is a strategy active managers have at their disposal and, we believe, an underappreciated component of portfolio construction.


DISCLAIMER: Opinions expressed herein represent those of the Institute For Wealth Management. These opinions are for informational purposes only and are not an offer to buy or sell, or a solicitation of any offer to buy or sell investment products. The content of these informational pieces should not be relied upon in making investment decisions. Different type of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either by suitable or profitable for your portfolio. All investment strategies have the potential for profit or loss and past performance is not guarantee of future success. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there is no assurances that it will match or outperform any particular benchmark. Please see the firm’s Form ADV Part 2A for more information. The types of investments discussed also do not represent all of the securities purchased, sold, or recommended for clients. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness.  While the Institute For Wealth Management believes the information to be correct, we do not claim or have responsibility for its completeness, accuracy or reliability.  The Institute also assumes no duty to update any information in these informational pieces for subsequent changes of any kind. Images are proprietary to the Institute For Wealth Management.

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