ETFs: The Building Blocks in Portfolio Construction

Brinker Capital’s Engelbart talks nontraditional strategies in a challenging market.

This article is part of a new series from etf.com highlighting financial advisors. 

Grant Engelbart, CFA, CAIA, is a senior portfolio manager at Brinker Capital Investments, an Orion Advisor Solutions brand, where he manages several exchange-traded fund and mutual fund separately account strategies. 

etf.com: How do you use exchange-traded funds to construct your client portfolios? 

Grant Engelbart: Across our various strategies, we have a number of different approaches. We have several dedicated all-ETF strategies, either in a multi-asset class framework or targeting specific areas of the market.  

However, we also incorporate active mutual funds where appropriate and where we don't yet have an ideal active ETF option; separately managed accounts for bond portfolios, particularly municipal bonds; and direct/custom indices on the equity side, which are generally large cap domestic.  

ETFs do still form the building blocks, particularly for specific asset class exposure, such as international markets and commodities, and to control overall portfolio risk. We do also utilize certain closed-end funds in some income strategies as appropriate. 

etf.com: Do you use any nontraditional ETFs, such as ESG ETFs, factor ETFs, smart beta ETFs or leveraged ETFs in client portfolios? If so, how are you using them?  

Engelbart: We have an ESG strategy that has been moving from mutual funds to ESG ETFs over the past several years as more options become available in the ESG ETF space. Outside of this, in the majority of our portfolios, we prefer smart beta or factor ETFs in most asset classes and incorporate them as such.  

We tend to not use leveraged ETFs, but do not explicitly prohibit their use in our strategies. Certain ETFs will have a small amount of leverage regarding futures-based commodities, managed futures or other alternative products. 

etf.com: What areas of the market are you currently underweighting and what are you overweighting? 

Engelbart: We currently favor quality and value companies both here in the U.S. and overseas. We also have a slight preference for overseas developed equities. In domestic markets, we utilize the Invesco S&P 500 Quality ETF (SPHQ) paired with the sector-neutral JPMorgan US Value Factor ETF (JVAL). We feel that this combination favors the most attractive companies while still maintaining a diversified approach.  

Overseas, we utilize the actively managed BNY Mellon Concentrated International ETF (BKCI) for high-conviction, high quality companies. We pair this with the Schwab Fundamental International Large Company Index ETF (FNDF), which maintains a well-diversified approach but leans towards value. We also have exposure in international small caps and emerging markets. 

etf.com: How are you approaching portfolios for retired clients in this challenging environment of high inflation, interest rate risk and increasing risk of recession? 

Engelbart: Many retired clients tend to be in the mid-to-low risk spectrum in our system. In many of those model portfolios, we hold commodities or other real assets, as well as some inflation-protected bond exposure. As interest rates have risen, particularly on the short end, we’ve increased the amount of high quality income exposure in these accounts.  

We also offer income-focused models where we will see many retired clients add on systematic withdrawals to help fund their retirement. To the extent possible, we want to fund these with dividends and interest from a well-diversified set of ETFs. Options strategies are a good way to generate higher income less correlated to other income strategies and also benefit from higher volatility. 

etf.com: What’s the average market sentiment among your clients, and how are you incorporating that sentiment into your recommendations?  

Engelbart: Most of our clients are cautious, but not overwhelmingly concerned at this point. Clients are able to choose their appropriate level of risk, as well as mix and match strategy types, so concerned clients will generally lower their risk level and add in conservative or downside protection strategies as needed.  

When we construct multi-asset class portfolios, we will generally have some more aggressive positions and some more conservative anchorlike positions in portfolios across the risk spectrum. Decomposing a portfolio and recognizing this concept can also help clients feel more comfortable and stay invested. 

Contact Kent Thune at [email protected]