Mixing Managed Funds With ETFs
NEW YORK (TheStreet) -- Financial advisers argue endlessly about whether index funds are superior to actively managed portfolios. Some advisers use index funds exclusively, while others believe that they can outdo the benchmarks with actively managed funds. But a growing number are taking a hybrid approach, mixing actively managed funds with passive ETFs and index funds.
"It is rare for us to see an adviser who puts everything in one kind of investment," says Sue Thompson, managing director of BlackRock, which operates the iShares family of ETFs.
Thompson says that some advisers start with a core of ETFs, then buy a few actively managed funds to add spice or reach asset classes that are not well served by ETFs. Other advisers start with a core of active funds and add ETFs on the margins.
Among the proponents of index funds and ETFs is Rick Ferri, who founded Portfolio Solutions, an investment adviser in Troy, Michigan. Ferri argues that passive funds can provide low costs and easy diversification. But he acknowledges there are cases when actively managed funds offer the most efficient ways to hold asset classes.To own municipal bonds, Ferri uses Vanguard Intermediate-Term Tax Exempt (VWITX), an actively managed fund. "The municipal ETFs tend to be more expensive and have much less diversification than the Vanguard fund," Ferri says. Vanguard Intermediate-Term holds 2,500 different municipal bonds and charges an expense ratio of 0.20%. In contrast, Market Vectors Intermediate Municipal Index (ITM), an ETF competitor, has an expense ratio of 0.24% and holds only 395 bonds. Ferri also prefers active funds for investing in high-yield corporate bonds. He owns Vanguard High-Yield Corporate (VWEHX), an active fund that has 325 bonds and charges an expense ratio of 0.25%. SPDR Barclays Capital High Yield Bond (JNK), a competing ETF, holds 223 bonds and has an expense ratio of 0.40%. An adviser who makes heavy use of active funds is Lou Stanasolovich, president of Legend Financial Advisors, based in Pittsburgh. As a core holding, he owns First Eagle Global (SGENX), an active fund. First Eagle works to limit risk by focusing on solid unloved stocks, such as Microsoft (MSFT) and ConocoPhillips (COP). When the managers can't find bargains, they hold cash. The fund currently has 16% of assets in cash. As an insurance policy, the fund has 10% of assets in gold mining stocks and bullion. The strategy has enabled the fund to excel in downturns. "First Eagle offers a huge amount of diversification," says Stanasolovich.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV