We are excited to share an important update as part of our ongoing commitment to optimizing your investment portfolio while remaining true to our core philosophy: managing risk first and striving to outperform the market net of fees over a full market cycle.
Building on over 20 years of successfully incorporating exchange-traded funds (ETFs) into our investment strategies, we are now transitioning the remaining portion of mutual funds and individual stocks into a thoughtfully designed ETF portfolio, excluding any legacy positions. This shift allows us to further reduce single-stock risk, enhance diversification, and improve both cost and tax efficiency — while continuing to actively capture market trends and opportunities.
Currently, depending on each client’s risk profile, portfolios are already allocated 75%–90% to ETFs, with 10%–25% in individual stocks and mutual funds. This transition simply completes that evolution while staying aligned with your long-term goals.
Below, we’ve outlined additional details, including answers to frequently asked questions and specific information for qualified and non-qualified accounts.
Why the Change from Mutual Funds to ETFs?
- Lower Costs: ETFs generally have lower expense ratios than mutual funds, reducing the drag of fees on long-term returns. This cost efficiency helps us pursue our goal of outperforming the market net of fees over a full market cycle.
- Tax Efficiency: ETFs are typically more tax-efficient due to their unique structure, which can minimize capital gains distributions and provide you with more control over when you incur taxable events.
- Greater Liquidity and Flexibility: ETFs can be traded throughout the day like stocks, allowing for more flexibility in managing your portfolio and taking advantage of market opportunities as they arise.
- Transparency: ETFs disclose their holdings daily, so you always know exactly what you own, enhancing transparency and trust in your portfolio’s composition.
- Diversification: Like mutual funds, ETFs offer access to a broad range of asset classes and sectors, supporting a diversified approach that aligns with your risk profile and investment objectives.
Why the Change from individual stocks to ETFs?
- Reducing Single Stock Risk: By moving away from individual stocks, we significantly reduce the risk that comes from holding a position in any one company. If a single stock faces unexpected challenges, it may lead to underperformance relative to the sector or market. ETFs, by design, spread investments across many companies, minimizing the impact of any one stock’s performance on your overall returns.
- Enhancing Diversification: ETFs offer instant diversification by holding a basket of securities—often hundreds or even thousands—across various sectors, industries, and regions. This broad exposure helps smooth out returns and reduces the volatility that comes with relying on a few individual stocks.
How will you Maintain Access to Market Trends with ETFs?
- Trend Participation Through Thematic and Sector ETFs: Some types of ETFs offer direct exposure to specific sectors, industries, or investment themes—such as technology, clean energy, artificial intelligence, or healthcare innovations. Thematic ETFs are designed to capitalize on long-term trends and disruptive innovations by bundling together companies that are leaders or beneficiaries of these movements. This allows us to efficiently position your portfolio to benefit from emerging opportunities without the need to pick individual stocks.
- Sector Rotation and Tactical Allocation: With sector-specific ETFs, we can quickly and efficiently shift portfolio exposure to areas of the market showing strength and reduce exposure to sectors that may be underperforming. Likewise, we can more easily shift between different asset classes like stocks, bonds, and commodities. This flexibility enables us to implement tactical strategies that respond to changing market conditions and evolving trends.
- Active and Dynamic Management: The rise of active ETFs means we can still leverage professional research and dynamic management to pursue outperformance and target specific investment outcomes. Active ETFs combine the advantages of active management with the efficiency and transparency of the ETF structure, allowing us to fine-tune your portfolio and pursue specialized strategies as market trends develop.
- Global and Style-Based Trends: ETFs provide access to global markets, investment styles (growth, value), and factors (dividends, cash flows, momentum, leverage ratios, etc.). This enables us to align your portfolio with macroeconomic shifts and international opportunities as they arise, as well as focus on factors that perform well over the long run.
Will this change the risk level of my portfolio?
- Your portfolio will continue to be managed according to your risk tolerance and long-term objectives. The shift to ETFs is about improving performance, efficiency, and transparency, not increasing risk.
Are ETFs safe?
- ETFs are regulated investment vehicles, similar to mutual funds, and are widely used by individual and institutional investors alike.
How will this affect performance?
- By reducing costs and improving tax efficiency, ETFs may help enhance net returns. Our disciplined, risk-managed approach remains unchanged.
Why Didn’t We Make This Change Sooner?
We have been investing in ETFs for over 20 years, and currently, 75%–90% of our portfolios are ETF-based. Recent advancements in factor-based and actively managed ETFs have enabled a select group to consistently outperform their benchmarks. In the past, we sometimes favored mutual funds over ETFs when they offered superior performance. Today, the latest generation of ETFs allows us to achieve the same objectives—strong returns and effective risk management—with lower fees and improved tax efficiency
Is there anything I need to do to facilitate this transition?
- No, you do not need to take any action. We will handle the entire transition process for you, carefully managing all trades and adjustments in a tax efficient way in your portfolio.
What does this mean for any of my legacy stock, bond, or alternative positions?
- We will stick to the original plan outlined between you and your advisor on any legacy stock positions – be it holding the positions indefinitely as a part of a larger estate plan, holding a bond to maturity, slowly selling out of the stock in a tax efficient way, waiting for open windows to sell restricted positions, or any other plan you have created with your advisor. Legacy positions are handled on a case-by-case basis and will not be impacted by the transition to ETFs.
The Transition: Qualified Accounts
For your qualified accounts—such as IRAs, 401(k)s, and other tax-advantaged retirement accounts—the transition to our new ETF-based portfolio can be completed immediately and in full. Since these accounts are not subject to capital gains taxes when securities are bought or sold within the account, we are able to efficiently realign your investments without generating any tax consequences. This allows us to promptly implement the enhanced diversification, risk management, and cost efficiencies of the new ETF strategy in these accounts.
You will benefit right away from the advantages of ETFs, including lower expenses, greater transparency, and the ability to quickly adjust allocations in response to market trends—all while maintaining your established investment objectives and risk profile. This streamlined process ensures your retirement assets are optimally positioned for long-term growth and resilience, with no disruption or additional tax burden to you.
The Transition: Nonqualified or Taxable Accounts
For clients with large unrealized capital gains in non-qualified (taxable) accounts, we recognize that transitioning to the new ETF-based portfolio immediately is not prudent. Instead, it requires a carefully tax-managed approach. To avoid triggering unnecessary tax liabilities, we will take a measured, multi-year approach to this transition. This means some accounts may take several years to fully move into the new ETF strategy, depending on the size of embedded gains and your individual tax situation. Rest assured though, the bulk of the portfolio is already in ETFs, so this should impact a small percentage of the portfolio depending on which risk profile you are in.
Throughout the transition of non-qualified (taxable) accounts, we will:
- Establish a Capital Gains Budget: We will set an annual limit on the amount of capital gains realized, tailored to your tax bracket and personal circumstances, to help minimize the impact of taxes and avoid pushing you into higher tax brackets unnecessarily.
- Utilize Tax-Loss Harvesting: Whenever possible, we will strategically sell investments at a loss to offset realized gains, further reducing your tax bill and potentially increasing your after-tax returns. This includes replacing sold positions with similar (but not identical) investments to maintain your portfolio’s diversification and alignment with your investment goals.
- Maintain Diversification with Equivalencies: Even as we gradually transition your holdings, we will use equivalent ETFs or similar investment vehicles to ensure your portfolio remains well-diversified and consistent with your risk profile at every stage of the process.
- Ongoing Monitoring and Adjustments: We will continually review your accounts for new opportunities to realize losses, rebalance, or transition additional positions in a tax-efficient manner, always with an eye on minimizing taxes and preserving portfolio integrity.
This thoughtful, phased approach ensures you benefit from the advantages of the new ETF portfolio—such as reduced single-stock risk, better diversification, and lower costs—without incurring unnecessary tax consequences. If you have questions about how this strategy will be implemented in your specific accounts, please reach out to your advisor; we are committed to making this transition as smooth and tax efficient as possible.
Wrapping it all up
In summary, this transition to an ETF-only portfolio is a natural progression of our long-standing strategy to optimize your investments using the most effective tools available. With over 20 years of experience utilizing ETFs, we are confident that this move will further reduce single-stock risk, enhance diversification, and improve both cost and tax efficiency while preserving our ability to actively pursue market trends and opportunities. Our investment philosophy and commitment to your financial goals remain steadfast, and you do not need to take any action; we will manage the entire transition for you. As always, our focus is on protecting and growing your wealth in today’s dynamic markets, and we are here to answer any questions you may have along the way.
