I'm a Portfolio Manager: The Market is Awash With ETFs, But This Variation May Give Advisers and Clients the Edge

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Today's investment environment is driving increased demand for growing income, supported by falling interest rates, persistent inflation and a growing population of retirees.

This demand feeds into financial advisers' allocation priorities — and it's a major reason Bahl & Gaynor now offers a suite of active ETFs.

From a portfolio construction standpoint, active ETFs offer several potential advantages, though these can vary based on market conditions, implementation and individual investor circumstances:

• Potential tax efficiency driven by a lower likelihood of capital gain distributions and deferral of internal gains
• Exposure to certain allocations in a single 'line item' for simplicity and clarity of positioning
• Possible reduction in cash drag through the smaller cash positions permitted by the ETF creation/redemption mechanism
• Intraday liquidity, enabled via the ETF creation/redemption mechanism, but subject to market conditions
• Competitive ongoing operating cost vis-à-vis the mutual fund structure

How these potential advantages are used often depends on how a financial adviser structures their practice. We observe two common practice models among advisers: Separately managed account (SMA)-centric practices, and adviser-as-portfolio manager practices.

SMA-centric practices

SMA-centric practices place SMAs at the center of client allocations. This typically covers core exposure to large cap domestic equities. It can also emphasize income generation and growth, particularly for clients approaching or in retirement.

Active ETFs can enable additional income exposure in this practice model. For example, an adviser may allocate to bullet maturity ETFs, collateralized loan obligation ETFs, and dividend growth ETFs to complement the income-producing capabilities of a large cap equity SMA allocation.

We often see strategies such as Bahl & Gaynor's smig® - Small/Mid Cap Income Growth ETF (SMIG) used alongside large cap equity income SMA allocations as a line item that extends income-generating exposure into often-overlooked small and mid-cap dividend-paying companies.

Adviser-as-portfolio manager practices

Other advisers structure their practices around a core discretionary equity model that their team manages, which may include a combination of individual equities, mutual funds, direct index exposure, and both passive and active ETFs.

Advisers often manage portfolios to a strategic asset allocation and risk profile, but they typically retain flexibility to achieve desired outcomes through a wide variety of solutions. For example, some advisers may add active dividend growth ETFs to complement the individual equity exposure they already manage on behalf of clients.

An adviser may pair their individual equity exposure with a dividend growth strategy like Bahl & Gaynor's Income Growth ETF (BGIG) as part of an approach to increase income production or as a completion portfolio for individual equity positioning.

Lessons learned from building an active ETF suite

Bahl & Gaynor's journey toward offering a suite of dividend growth ETFs has not been linear. It has evolved over time as we scaled our ETF family. What has remained consistent is our focus on maximizing flexibility for advisers and their clients in achieving important goals.

As we built our active ETF suite, several key decisions shaped both implementation and adviser usability. These included:

• Transparent vs semi-transparent holdings
• Investment strategy liquidity fit
• Clarity of targeted client outcomes

Transparent ETFs are the overwhelming choice for advisers today, but as an issuer this was not such a clear-cut decision when we launched our first ETF in 2021. But our firm's commitment to SMAs was also a commitment to transparency in how we manage client funds. Selecting a fully transparent structure for our ETF offerings harmonized with this foundational commitment.

It is also important to recognize that the vehicle in which a strategy is held does not change the underlying liquidity profile of strategy holdings. We wanted to ensure the underlying liquidity of our strategies would harmonize with the active ETF structure. We have found the ETF creation/redemption mechanism to be an effective structural mechanism for new and departing shareholders in this regard.

There are now more ETFs trading than individual public companies in US markets. This has created a "sea of same-ness" in terms of passive and active investment solutions in the ETF wrapper.

When we began building our ETF franchise, we wanted to ensure that our targeted client outcomes were clearly stated to transparently align with adviser and client goals. We focus on clearly defined client outcomes — strategies designed to generate growing income, downside risk protection and long-term alpha generation — to help advisers align allocations with client expectations.

Conclusion

The growth of active ETFs reflects more than just a shift in vehicle structure — it reflects a shift in how advisers build portfolios. Flexibility, transparency and tax efficiency are increasingly essential, but equally important is the alignment of investment strategies with how advisers build portfolios across different practice models.

Dividend growth strategies, delivered through the ETF wrapper, offer a versatile solution, capable of serving as a complementary allocation within SMA-centric practices or as a core building block within adviser-managed portfolios.

Ultimately, the value of the structure is realized not just in its features, but in how effectively it helps advisers deliver on client objectives with clarity and consistency.

As the ETF landscape continues to evolve, we believe the combination of disciplined investment strategies and flexible implementation will remain central to helping advisers and their clients navigate an increasingly complex market environment.

This material is for informational purposes only and does not constitute investment advice or a recommendation. All investments involve risk, including the possible loss of principal. Dividend payments are not guaranteed and may be reduced or eliminated. ETFs are subject to market risk and may trade at a premium or discount to net asset value. Any discussion of tax efficiency is general in nature; outcomes will vary based on individual circumstances. References to specific strategies are for illustrative purposes only.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.