ETF Managed Portfolios U.S. Equity...

ETF Managed Portfolios Research

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U.S. Equity Strategies

The tactical message continues to resonate through equity market rally

ETF managed portfolios are investment strategies that typically hold more than 50% of portfolio

assets in exchange-traded funds. Primarily available as separate accounts, they represent one of the

fastest-growing segments of the managed account universe. Morningstar has developed a

proprietary classification system for ETF managed portfolios that identifies the investments’ portfolio

attributes. The structure consists of four main attributes: universe, asset breadth, portfolio

implementation, and primary ETF exposure type. This system helps investors better understand the

philosophies underlying these investment strategies. Refer to 3 for a comprehensive

description of these attributes.

As part of this series we’re taking an inside look at the industry using the combination of universe

and asset breadth attributes as a filter. This particular commentary is focused on United States

(universe) Equity (asset breadth) strategies. The latest Morningstar ETF Managed Portfolios

Landscape report is a comprehensive industry review of strategies that report information to

Morningstar’s separate account database.

Current Market Environment & Growth

U.S. Equity strategies have benefited from the recent equity market rally and continue to be a

primary portfolio building block for many advisors. In 2013, assets in these strategies grew 89% to

$34.5 billion making U.S. equity strategies the largest profile by assets when comparing ETF

managed portfolios by Morningstar’s universe and asset breadth classifications. By comparison,

total assets amongst all ETF managed portfolios increased by 40% in 2013 and exchange-traded

products’ assets under management grew 27%.

Exhibit 1

Cross-Section Profile

Universe and Asset Breadth Combination Assets USD Mil

United States Equity 34,115.8

Global All Asset 28,324.3

Global Equity 11,522.5

Global Balanced 10,544.2

United States Balanced 3,595.3

International Equity 2,440.8

United States Fixed Income 2,195.2

Global Fixed Income 1,981.8

Source: Morningstar Inc.

As of December 31 2013

21 April 2014

Ling-Wei Hew

Analyst

ETF Managed Portfolios Research

[email protected]

+1 312 348-2721

ETF Managed Portfolios

Attribute Profile

http://global.morningstar.com/ETFMPLandscape

http://global.morningstar.com/ETFMPLandscape

mailto:[email protected]

U.S. Equity Strategies | ETF Managed Portfolios Research | 21 April 2014 2





Exhibit 2

Current Assets (%) by Attribute

Universe All Asset Alternative Balanced Equity

Fixed

Income Total

Global 29.6 0.2 1.0 12.1 2.1 54.9

International 0.0 0.0 0.0 2.6 0.0 2.6

United States 0.4 0.3 3.8 35.7 2.3 42.5

Total 30.1 0.5 14.8 50.3 4.4 100.0



Exhibit 3

Equity Strategies, USD Mil



How They Can Be Used

U.S. equity strategies can be used in a variety of ways—especially if decision makers consider the

characteristics of the prospective return stream rather than the portfolio holdings. Most commonly,

advisors will invest the core portion of clients’ portfolios in these strategies. Institutions and other

large investors can also consider them for use as a satellite holding or risk-diversifying allocation,

depending on their drawn-down and volatility-consistency goals.

0

10,000

20,000

30,000

40,000

50,000

60,000

Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013

Global International United States






The ETF managed portfolio universe in general is heavily weighted toward tactical and hybrid

strategies. However, in the U.S. Equity realm, the saturation of tactical strategies is particularly

pronounced, accounting for 92% of assets in this universe as of Q4 2013. Be cautioned, however,

that we use the term “tactical” as a broad descriptor for an actively managed strategy that makes

large asset movements according to a specified objective. Two strategies can be tactical in nature,

but have vastly different objectives and return stream characteristics. For example, one may be

opportunistic—regularly making large shifts into and out of the market—while another may stay

fully invested at all times but rotate assets between sectors.

When used as a core building block, these strategies can be viewed as a source of equity risk to an

investor’s portfolio. The combination of these factors makes the ability to move to fixed income or

cash a sensible option. The tactical lever serves as a means of either isolating the risk of the equity

core, or as a tool to change the overall risk profile of an investor’s portfolio. Nonetheless, not all

tactical strategies that have the ability to “go to cash” are designed for use as a core holding. For

example, Innealta’s sector rotation strategies are intended as satellite holdings that align more

closely with the characteristics of the liquid alternatives portion of an investor’s portfolio.

Given the variety of tactical strategies available, understanding a strategy’s objective and how it is

designed to fit within a portfolio is key. When picking a strategy, it is important to consider not only

how it complements the other holdings in the portfolio, but also how the strategy can affect the risk

profile and composition of the total portfolio in all states—bullish, bearish, and steady.

Below are two simplified examples of traditional portfolios, a pure equity portfolio and a 60/40

stock/bond portfolio. The equity component is approximated by SPDR S&P 500 ETF SPY and the

fixed income component is approximated by the iShares Barclays Aggregate Bond Fund AGG. Using

these simplified portfolios as a base, the impact of adding a strategy on some common risk and

return statistics can be seen. For the 30/40/30 portfolio we carve out half of the equity sleeve and

instead place the assets in a tactical core strategy, for example Good Harbor U.S. Tactical Core. To

expand on this further, similar analysis should be run in various states of the market to provide a

holistic picture of how the portfolio fairs under different conditions and whether it meets the

objectives of the client.






Exhibit 4

3-year Risk & Return Analysis

SPY

60/40

Portfolio

30/40/30*

Portfolio Strategy

Alpha -0.08 1.97 5.01 11.54

Beta 1.00 0.47 0.35 0.26

Down Capture Ratio 99.98 43.74 33.40 28.82

Max Drawdown -16.26 -5.93 -3.74 -6.35

Sharpe Ratio 1.29 1.60 1.92 1.55

Sortino Ratio 2.31 3.11 4.01 3.05

R2

100.00 93.80 60.74 9.98

Std Dev 12.08 5.86 5.51 10.15

3 Year Return % 16.05 9.66 11.03 16.39

2013 Return % 32.21 14.53 16.49 27.08

*30% SPY, 40% AGG, 30% Good Harbor U.S. Tactical Core


As of December 31, 2013

Below we highlight the top strategies based on risk-adjusted return, core/alpha characteristics, and diversification.

Exhibit 5

Highest Sharpe Ratio

(3-Year Return)

Name

Portfolio

Implementation

Sharpe

Ratio

3-Year

Return %

Assets

USD Mil

Winterset Active/Edge ETF Growth Strategic 2.43 23.81 11.0

TTM 500 Strategy Tactical 1.77 12.09 1.0

F-Squared AlphaSector Premium Index Tactical 1.70 15.99 3,235.8

BCM Sector Rotation IDX Tactical 1.68 15.41 22.6

F-Squared AlphaSector Premium Cmpst Tactical 1.68 15.11 0.0

F-Squared Premium AlphaSector Index Tactical 1.66 15.20 6,989.1

Virtus Premium Alpha Sector Composite Tactical 1.66 14.95 219.1

iSectors Post-MPT Growth Allocation Tactical 1.63 16.67 22.7

F-Squared Rotation AlphaSector Index Tactical 1.62 15.67 765.6

F-Squared AlphaSector Rotation Index Tactical 1.60 15.29 1,475.5

Good Harbor Tactical Core US Tactical 1.55 16.39 10,436.6

MRM Dynamic Overlay Strategy Tactical 1.46 14.94 47.2

Churchill Smart Sector 500 Strategic 1.45 17.05 70.8

Hillswick S&P 500 Sector Selection Tactical 1.42 16.18 99.3

Raylor Strategic US Equity SMA Strategic 1.34 16.01 1.0








Exhibit 6

Highest 3-Year Return

Exhibit 7

Lowest Correlation

(3-Year Return)

Name

Portfolio

Implementation

3-Year

Return %

Assets

USD Mil

Winterset Active/Edge ETF Growth Strategic 23.81 11.0

Niemann Dynamic Tactical 17.07 36.5

Churchill Smart Sector 500 Strategic 17.05 70.8

iSectors Post-MPT Growth Allocation Tactical 16.67 22.7

Niemann Dynamic Sector Tactical 16.48 2.5

Good Harbor Tactical Core US Tactical 16.39 10,436.6

Hillswick S&P 500 Sector Selection Tactical 16.18 99.3

Raylor Strategic US Equity SMA Strategic 16.01 1.0

F-Squared AlphaSector Premium Index Tactical 15.99 3,235.8

F-Squared Rotation AlphaSector Index Tactical 15.67 765.6

BCM U.S. Sector Rotation (Monthly) Tactical 15.41 22.6

F-Squared AlphaSector Rotation Index Tactical 15.29 1,475.5

F-Squared Premium AlphaSector Index Tactical 15.20 6,989.1

Braver Tactical Equity Sector Rotation Tactical 15.18 27.2

Virtus Premium Alpha Sector Composite Tactical 14.95 219.1

SPDR S&P 500 (SPY)

16.05

Vanguard Total Stock Market ETF (VTI)

16.24



Name

Portfolio

Implementation R2

3-Year

Return %

Assets

USD Mil

Winterset Active/Edge ETF Growth Strategic 0.77 23.81 11.0

iSectors Post-MPT Growth Allocation Tactical 2.94 16.67 22.7

Good Harbor Tactical Core US Tactical 9.92 16.39 10,436.6

Innealta Tac ETF Sector Rotation Core Tactical 22.50 5.39 1,173.6

Innealta Tac ETF Sector Rotation Opp Tactical 23.22 5.76 141.1

TTM Momentum-Core Tactical 28.53 10.10 10.8

Robinson Market Opportunity Tactical 28.95 8.05 4.8

TTM 500 Strategy Tactical 37.25 12.09 1.0

TTM Momentum- Low Volatility Tactical 38.59 7.18 4.5

Niemann Risk Managed Tactical 42.26 11.01 34.2

Niemann Risk Managed Sector Tactical 44.50 8.54 5.3

CHURCHILL PREMIER WEALTH Tactical 47.76 7.38 2,505.0

Forward Tactical Growth Hybrid 49.30 7.14 1,113.8

Swan Defined Risk Strategy Strategic 55.71 6.52 356.4

TTM Momentum-Growth Tactical 57.41 10.23 2.0

The correlation statistics were calculated against Vanguard Total Stock Market ETF (VTI)








Exhibit 8

Correlations for the 10 Largest Strategies (3-Year Return)

Name 1 2 3 4 5 6 7 8 9

1 Good Harbor Tactical Core US

2 F-Squared Premium AlphaSector Index 0.54

3 F-Squared AlphaSector Premium Index 0.54 1.00

4 CHURCHILL PREMIER WEALTH 0.47 0.88 0.87

5 F-Squared AlphaSector Rotation Index 0.52 0.99 0.99 0.88

6 Innealta Tac ETF Sector Rotation Core (0.07) 0.24 0.25 0.10 0.22

7 Forward Tactical Growth 0.50 0.82 0.81 0.79 0.79 0.24

8 F-Squared Rotation AlphaSector Index 0.52 0.99 0.99 0.88 1.00 0.22 0.79

9 Acertus Planned Return Strategy 0.08 0.63 0.63 0.45 0.58 0.65 0.50 0.58

10 Swan Defined Risk Strategy 0.35 0.90 0.90 0.81 0.92 0.21 0.69 0.92 0.56



Exhibit 9

R2

for the 10 Largest Strategies (3-Year Return)

Showcasing the Full Gamut of Investment Styles

Given the unparalleled liquidity and depth of the domestic stock market there are ETFs available to

access virtually any market segment. Presented with this extensive toolbox, U.S. Equity strategies

have the flexibility to be creative with their market exposure. Many strategies will have similar

objectives but vastly different ways of trying to achieve them so, as mentioned before, a good

understanding of what a strategy does to achieve its objectives is crucial. Here are a few questions

to ask.

US Equity US Bond Int'l Equity EM Equity Cmdty

VTI BND VEU VWO DBC

Good Harbor Tactical Core US 9.92 0.69 2.79 0.80 0.70

F-Squared Premium AlphaSector Index 71.11 4.32 51.33 30.01 17.13

F-Squared AlphaSector Premium Index 70.84 4.79 52.45 30.63 17.73

CHURCHILL PREMIER WEALTH 47.76 4.89 33.85 20.01 14.24

F-Squared AlphaSector Rotation Index 63.89 3.95 45.40 25.32 13.05

Innealta Tac ETF Sector Rotation Core 22.50 31.86 39.78 43.77 31.80

Forward Tactical Growth 49.30 0.87 36.58 21.96 12.99

F-Squared Rotation AlphaSector Index 64.01 3.99 45.78 25.49 13.25

Acertus Planned Return Strategy 84.26 0.62 75.78 69.93 56.09

Swan Defined Risk Strategy 55.71 3.28 43.82 28.00 8.70








What types of ETFs are being used?

U.S. Equity strategies will typically hold sector ETFs, broad-based ETFs, or a mixture of the two in

order to gain market exposure. The strategies that primarily use sector ETFs are typically sector

rotation strategies, such as Innealta’s Tactical ETF Sector Rotation Core strategy or Niemann’s

Dynamic Sector strategy. There are also strategies that invest in broad-based ETFs to gain overall

market exposure and consider factors expected to drive the equity market as a whole, such as Good

Harbor Tactical Core US or Braver Tactical Opportunity.

How are the individual ETFs selected?

Most often U.S. Equity strategies will take a top-down approach to selecting which ETFs to invest

in, looking at statistics such as momentum, relative volatility, and various yield-curve indicators to

form the basis of model inputs which help determine which segments of the market to rotate into.

Others will take a bottoms-up approach, identifying fundamentally solid stocks and then choosing

ETFs that the managers feel are good proxies for these stocks.

If a strategy is tactical, where are the assets moving and on what basis?

The factors that these managers consider when allocating assets are similar to those listed above

that pertain to how individual ETFs are selected. As mentioned above, some strategies will rotate

amongst different corners of the market but continue to stay invested at all times, while others will

opportunistically move assets to cash. Knowing how managers invest their “cash” or are otherwise

“out of the market” is important. Some strategies will hold U.S. Treasury ETFs, while some will hold

short duration credit, such as PIMCO Enhanced Short Maturity MINT. There are also strategies that

will use a tactical fixed-income model to manage assets taken out of the market. For example,

Innealta’s Rotation Strategies, which use its Tactical Fixed Income model as a parking place for

“cash”. Each of these approaches can have a very different impact on the strategy’s total risk

profile.

How is risk being managed?

Many tactical strategies have built-in risk management functions, using derivatives or market timing

signals that indicate when to move assets to more advantageous areas of the market or out of the

market completely. Some strategies even outsource risk management through the use of a third

party overlay model. These programs are designed to hedge market risks through a managed

portfolio of derivatives or provide signals indicating when to modify the asset allocation of the

underlying portfolio.

As clients tend to have specific mandates or preferences, these are all things to keep in mind when

selecting a strategy. BCM’s Sector Rotation and PVG Asset Management’s Dynamic Core strategy

are two examples that exemplify the points made above. Similar to most strategies, both are

modelled to capture rising stock and bond market returns while minimizing losses during falling

markets.

BCM’s Sector Rotation Index is designed as a core U.S. equity portfolio holding. It focuses primarily

on sector exposure, rotating its assets between the nine SPDR Select Sector ETFs based on

quantitative market timing signals. Only those sectors with positive momentum signals are included

in the portfolio. For downside protection it can go in part or fully to cash at any time, investing in

either a money market fund or short-term U.S. Treasury ETFs.

PVG Asset Management’s Dynamic Core ETF Strategy on the other hand is not a market timer. It

follows a bottoms-up approach to selecting ETFs, beginning with identifying securities of companies

that have favorable sales and earnings growth potential. The strategy’s approach to picking ETFs

lends itself well to investing in ETFs that represent more niche sectors of the market, such as the






iShares Dow Jones US Oil Equipment ETF IEZ and the PowerShares Dynamic Networking Portfolio

ETF PXQ. Instead of going to cash for downside protection, the portfolio is hedged using inverse

market index securities, stop losses, and cash positions to reduce overall portfolio volatility.

The Major Players

The growth in U.S. Equity strategies continues to be dominated by the industry’s top players,

keeping assets concentrated. As of Q4 2013, the ten largest U.S. Equity strategies collectively held

90% of assets under this attribute combination.

Exhibit 10

Largest Strategies

Good Harbor’s U.S. Tactical Core strategy topped the growth rankings, amassing an additional

$6.7 billion in assets in 2013 to end the year at $10.4 billion. The strategy’s model emphasizes risk

management through equity exposure and can allocate between U.S. stocks, treasuries, and cash.

It is rebalanced as often as monthly, depending on the direction of the equity risk premium as a

measure of investor sentiment. Since this premium is not directly observable, it is approximated by

the additional compensation investors require to take on equity risk and measured through relative

expected returns. Good Harbor uses a quantitative model based on momentum, treasury yield curve

Return %

Name

Assets

USD Mil

2013

Growth 2013 3-Year

Good Harbor Tactical Core US 10,436.6 6,685.6 27.08 16.39

F-Squared Premium AlphaSector Index 6,989.1 3,412.2 32.02 15.20

F-Squared AlphaSector Premium Index 3,235.8 1,980.2 32.87 15.99

CHURCHILL PREMIER WEALTH 2,505.0 122.5 29.21 7.38

F-Squared Dynamic AlphaSector Index 2,329.8 1,939.8 40.64 -

F-Squared AlphaSector Rotation Index 1,475.5 1,035.7 32.31 15.29

Innealta Tac ETF Sector Rotation Core 1,173.6 -393.4 -2.62 5.39

Forward Tactical Growth 1,113.8 -421.9 18.34 7.14

F-Squared AlphaSector AlphaDEX Pre Idx 782.1 448.2 38.71 -

F-Squared Rotation AlphaSector Index 765.6 293.6 33.40 15.67

Acertus Planned Return Strategy 379.9 24.9 8.60 7.95

Swan Defined Risk Strategy 356.4 43.4 14.85 6.52

Swan Defined Risk Strategy All Accounts 356.4 356.4 14.47 6.59

Virtus Premium Alpha Sector Composite 219.1 88.5 30.91 14.95

Pinnacle Dynamic Appreciation 200.0 54.0 19.10 9.85

Main Management Active - US Large Cap 171.5 59.1 31.19 13.60

Churchill 70 PREM WLTH/30 SMART SEC 156.6 102.4 30.20 -

RPG AlphaSector Core Domestic Equity 144.4 136.0 32.68 -

Innealta Tac ETF Sector Rotation Opp 141.1 -173.2 -2.92 5.76

WST Asset Manager - U.S. Equity 120.6 120.1 29.09 -








indicators, and macroeconomic data to form its view on investor sentiment and will modify the

strategy’s asset allocation accordingly. The strategy is designed to be a source of equity risk and

used as a portfolio’s risk-setting mechanism across all states of the market. It is intended to work as

a tactical component within the equity sleeve of a portfolio, and when used in this way is intended

to form a significant, but not dominant portion of the portfolio. As a result, the strategy makes large

market beta moves in order to tactically modify the total risk level of the investor’s overall portfolio.

Part of the strategy’s impressive growth is due to its calculated bets on leveraged ETFs such as

ProShares Ultra Russell 2000 UWM and ProShares Ultra S&P 500 SSO which saw returns of 87.0%

and 70.5% in 2013, respectively. In addition, assets have also been flowing into the strategy with

the expansion of Good Harbor’s distribution channels. It has continued to be added to many major

platforms, in both its SMA and open end fund forms.

Acertus’ Planned Return strategy utilizes a combination of ETFs and options to provide downside

protection. It is designed to serve as a core holding in an equity or long-short portfolio and aims to

deliver systematic and predictable returns. Relative to the S&P 500, the strategy’s returns have been

consistently dampened, resulting in a 3-year upside- and downside- capture ratio of 45.74 and

39.34, respectively. In addition, the standard deviation of returns for the strategy has been regularly

below that of the S&P 500, providing for a smoother return stream. The strategy follows a series of

mathematically constructed tranches which dictate the allocation between ETFs and CBOE Flex™

options, customizable option contracts offered by the Chicago Board Options Exchange. The

tranches are predetermined and lend themselves well to a rules-based investment process,

mitigating the behavioral trap of buying high and selling low.

Swan’s Defined Risk strategy, like Acertus’, uses a blend of ETFs and options. In particular, Swan

uses a combination of SPDR Select Sector ETFs and the SPDR S&P 500 SPY for its core equity

exposure; it then hedges these holdings using a series of put options. In addition, the strategy also

collects the premiums on out-of-the money index options written for further return enhancement.

The strategy is designed to serve as a core investment holding due to its market-neutral investment

strategy and is available through TD Ameritrade’s platform. It also has a mutual fund offering

available on TD, Schwab, Pershing, and LPL, among other platforms.

The Near-Term Prospects

As long as the domestic equity market continues to remain strong, U.S Equity Strategies will likely

keep the lion’s share of ETF managed portfolio assets. We don’t expect vast changes in the way

they’re used in portfolios so the rate of continued growth likely hinges on the performance of U.S.

stocks.

The U.S. Equity landscape, similar to the overall ETF managed portfolio landscape, is expected to

remain top heavy. The largest strategies have gotten their foot in the door at most major platforms

and are logistically prepared to support the sizable quantity of advisors from these platforms – this

includes fielding advisor phone calls, having ample distribution and marketing material, and providing

education around the strategies. Having built for scale, expanding distribution looks to be a matter of

momentum.






U.S. Equity Strategies

Return (%)

Name

Inception

Date

Portfolio

Implement

-ation

Primary ETF

Exposure

Type 2013 3-Year 5-Year 10-year

Assets

USD Mil

Acertus Planned Return Strategy 08/31/09 Strategic Broad Market 8.60 7.95 - - 379.9

Appleton Group PLUS-Moderate 01/03/00 Hybrid Broad Market 8.52 3.20 3.92 2.92 15.5

Appleton Group-Moderate 01/03/00 Hybrid Broad Market 11.18 5.61 8.25 5.16 4.6

Astor S.T.A.R. Program 12/31/99 Tactical All-Inclusive 31.15 11.09 14.71 7.95 30.1

BCM AlphaDEX Sector IDX 09/01/11 Tactical Sector 36.22 - - - 96.4

BCM Growth 11/02/09 Hybrid All-Inclusive 14.63 9.04 - - 82.1

BCM Growth Premium 11/02/09 Hybrid All-Inclusive 13.40 7.99 - - 74.1

BCM Sector Premium IDX 02/01/11 Tactical Sector 29.92 - - - 76.6

BCM Sector Rotation IDX 07/01/10 Tactical Sector 32.01 15.41 - - 22.6

Braver Tactical Balanced 12/31/03 Tactical Broad Market 15.05 6.83 9.26 - 70.7

Braver Tactical Equity Sector Rotation 07/01/96 Tactical Sector 33.41 15.17 14.99 8.77 27.2

Braver Tactical Opportunity 12/31/85 Tactical All-Inclusive 11.97 4.43 6.71 5.04 101.1

Churchill 70 PREM WLTH/30 SMART SEC 09/04/12 Hybrid All-Inclusive 30.20 - - - 156.6

CHURCHILL PREMIER WEALTH 10/01/96 Tactical All-Inclusive 29.21 7.38 10.98 5.67 2,505.0

Churchill Smart Sector 500 10/01/07 Strategic Sector 34.97 17.05 15.83 - 70.8

Clark Navigator Sector Opportunity 01/03/07 Tactical Sector 28.87 11.39 17.11 - 69.0

Clark Navigator Style Preferred Core 09/01/04 Tactical Broad Market 24.90 11.35 15.99 - 0.9

Clark Navigator U.S. Style Opp (SAI) 01/03/05 Tactical Broad Market 32.06 12.61 18.47 - 1.4

Clark Navigator U.S. Style Opportunity 12/31/04 Tactical Broad Market 32.06 12.61 18.47 - 83.9

Confluence Aggressive Growth 08/01/08 Tactical All-Inclusive 23.67 9.33 - - 5.0

Cumberland - US Equity ETF 12/31/99 Tactical All-Inclusive 32.60 13.21 17.28 - 73.7

Efficient Market 20 Plus Years Consvt 05/01/06 Hybrid All-Inclusive 19.70 11.63 15.85 - 18.4

Efficient Market 20 Plus Years Moderate 01/03/05 Hybrid All-Inclusive 23.05 12.52 16.69 - 13.8

Efficient Market 20 Plus Yrs Aggressive 11/01/04 Hybrid All-Inclusive 24.73 11.59 16.75 - 17.5

Forward Tactical Growth 08/03/09 Hybrid Broad Market 18.34 7.14 - - 1,113.8

F-Squared AlphaSector AlphaDEX Pre Idx 09/01/11 Tactical Sector 38.71 - - - 782.1

F-Squared AlphaSector AlphaDEX Prm Cmpst 09/01/11 Tactical Sector - - - - 0.0

F-Squared AlphaSector Premium Cmpst 10/01/08 Tactical Sector 30.67 15.11 18.12 - 0.0

F-Squared AlphaSector Premium Index 10/01/08 Tactical Sector 32.87 15.99 19.48 - 3,235.8

F-Squared AlphaSector Rotation Index 10/01/08 Tactical Sector 32.31 15.29 17.28 - 1,475.5

F-Squared Dynamic AlphaSector Index 03/01/12 Tactical Sector 40.64 - - - 2,329.8

F-Squared Premium AlphaSector Index 10/01/08 Tactical Sector 32.02 15.20 18.92 - 6,989.1

F-Squared Rotation AlphaSector Index 10/01/08 Tactical Sector 33.40 15.67 17.51 - 765.6

Good Harbor Tactical Core US 04/30/03 Tactical Broad Market 27.08 16.39 22.22 13.84 10,436.6

Green Inv Mgt Guardian Mosaic 07/03/00 Hybrid All-Inclusive 23.16 9.65 13.96 6.00 1.0






Green Inv Mgt Guardian Sector 07/01/93 Tactical Sector 32.94 13.52 14.79 5.06 0.1

Hillswick S&P 500 Sector Selection 09/02/08 Tactical Sector 31.56 16.18 17.73 - 99.3

Innealta Tac ETF Sector Rotation Core 12/31/09 Tactical Sector -2.62 5.39 - - 1,173.6

Innealta Tac ETF Sector Rotation Opp 12/31/09 Tactical Sector -2.92 5.76 - - 141.1

IRON S&P 500 Equity Plus 05/02/11 Strategic Broad Market 18.44 - - - 0.1

iSectors Domestic Equity Allocation 07/01/10 Strategic Broad Market 28.77 14.05 - - 21.6

iSectors Post-MPT Growth Allocation 02/01/05 Tactical Sector 28.73 16.67 12.83 - 22.7

Julex Capital Mgmt Dynamic Factor 11/01/12 Tactical All-Inclusive 32.82 - - - 1.4

Longview Capital Dynamic Large Cap SMA 07/12/12 Tactical All-Inclusive 25.88 - - - 13.3

Madison ETF Aggressive 01/01/10 Strategic All-Inclusive 24.33 11.65 - - 3.6

Madison ETF Growth 01/01/10 Strategic All-Inclusive 19.86 10.40 - - 36.8

Main Management Active - US Large Cap 09/30/02 Tactical Broad Market 31.19 13.60 18.49 8.83 171.5

Mench Aggressive Equity 10/02/95 Tactical All-Inclusive 37.74 13.53 17.29 8.09 1.2

MRM Dynamic Overlay Strategy 04/03/06 Tactical All-Inclusive 29.78 14.94 12.44 - 56.8

Niemann Dynamic 02/20/97 Tactical Sector 43.35 17.07 17.98 9.27 36.5

Niemann Dynamic Sector 02/20/08 Tactical Sector 36.42 16.48 16.81 - 2.5

Niemann Risk Managed 09/30/96 Tactical Sector 46.57 11.01 10.42 7.29 34.2

Niemann Risk Managed Sector 01/24/96 Tactical Sector 33.69 8.54 7.90 9.39 5.3

Pinnacle Dynamic Appreciation 10/31/02 Strategic All-Inclusive 19.10 9.85 13.15 7.72 200.0

PTI Russell 2000 Protected Index 08/01/05 Hybrid Broad Market - - - - NR

PTI Securities & Futures Prot Idx Prog 03/02/98 Hybrid Broad Market - - - - NR

PVG Dynamic Core ETF 09/30/02 Tactical All-Inclusive 9.84 6.24 - - 5.0

Raylor Strategic US Equity SMA 01/03/06 Strategic All-Inclusive 32.07 16.01 17.68 - 1.0

RBA SMRT Strategic Eq Port ft AlphaDEX® 02/15/12 Strategic Sector 35.67 - - - NR

RBA SMRT Tactical Eq Port ft AlphaDEX® 02/15/12 Tactical Sector 13.17 - - - 0.5

RevenueShares Strategic Allocation 07/01/11 Tactical Broad Market 32.31 - - - 0.1

Robinson Market Opportunity 12/31/03 Tactical Broad Market 0.48 8.05 10.90 7.15 4.8

RPG AlphaSector Core Domestic Equity 11/01/11 Tactical Sector 32.68 - - - 144.4

RPG AlphaSector Premium FT 03/01/12 Tactical Sector 35.97 - - - 19.4

RWM Dynamic All Asset Strategy 08/31/12 Strategic All-Inclusive 24.28 - - - 26.0

SignalPoint Domestic Signal 12/31/09 Hybrid All-Inclusive 25.33 12.41 - - 1.0

SignalPoint Signal 10 03/31/09 Hybrid Sector 25.22 12.51 - - 20.5

SSWM Strategic Allocation Model 75/25 08/29/03 Strategic Broad Market 19.58 10.68 14.88 6.95 6.6

Swan Defined Risk Strategy 07/01/97 Strategic Broad Market 14.85 6.52 10.74 9.96 356.4

Swan Defined Risk Strategy All Accounts 07/01/97 Strategic Broad Market 14.47 6.59 10.35 9.55 Incl.

TAMP US Tactical ETF SectGrwth-SAGE 02/01/13 Hybrid All-Inclusive - - - - 5.7

TTM 500 Strategy 01/03/06 Tactical Broad Market 18.76 12.09 13.10 - 1.0

TTM Momentum- Low Volatility 01/03/06 Tactical Broad Market 18.80 7.18 13.33 - 4.5

TTM Momentum-Core 01/03/06 Tactical Broad Market 25.24 10.10 18.22 - 10.8

TTM Momentum-Growth 01/03/06 Tactical Broad Market 29.19 10.23 21.03 - 2.0






U.S. Equity Strategies (continued)

Virtus Alpha Sector Rotation Composite 01/31/11 Tactical Sector 32.70 - - - 7.6

Virtus Premium Alpha Sector Composite 07/01/10 Tactical Sector 30.91 14.95 - - 219.1

Winterset Active/Edge ETF Growth 01/03/00 Strategic All-Inclusive 14.55 23.81 23.48 20.56 11.0

WST Asset Manager - U.S. Equity 12/31/12 Tactical Sector 29.09 - - - 120.6








ETF Managed Portfolio Attributes

Morningstar’s attribute structure for ETF managed portfolios gives investors and primary

decision-makers more granular information to better compare one strategy’s portfolio,

philosophy, and potential profile with another's. The new attribute classifications rely on

both our analysis of the investment strategy and a historical review of disclosed holdings.

Our new structure consists of four main attributes: universe, asset breadth, portfolio

implementation, and primary ETF exposure type. With better insight into a strategy’s

attributes, investors can better understand its broad philosophy. These four attributes are

then further broken down into a list of unique classifications. Each strategy is assigned one

classification within each attribute.

Universe

The first attribute describes the starting scope of a strategy’s investment process on a

global basis. The distinction is based upon the exposure of the underlying securities within

the ETF used, not the domicile of the ETF itself. The classifications for this attribute are

United States, international, and global.

United States: U.S. portfolios primarily use ETFs providing exposure to U.S. equity and

fixed-income securities.

International: International portfolios primarily use ETFs providing exposure to non-U.S.

equity and fixed-income securities.

Global: These strategies have the opportunity to add exposure to any market across the

globe and have historically employed such flexibility.

The initial selection of this attribute is based on many factors, including a review of the

strategy’s current Morningstar separate account category and institutional category, as

well as an analysis of available portfolios. Where available, we’ve also reviewed a firm’s

deck or description of the investment strategy to note any starting universe or list of

available ETFs or asset classes for investment. In benchmark or starting portfolios, the

global attribute was assigned to strategies with at least an 80/20 split among U.S. and

international exposure. We also took into account, where necessary, the regional exposure

of the dominant asset driver designated in the asset breadth attribute.

Asset Breadth

The classifications within this attribute indicate a strategy’s primary asset class exposure

or returns driver. There are five options here: all-asset, alternative, balanced, equity, and

fixed income. These selections don’t indicate that the whole portfolio is, for example,

invested in equities or bonds but rather sets the expectation for advisors and investors

regarding the primary driver of returns. Classification within this attribute includes an

analysis of historical portfolio asset allocations and a review, if available, of a strategy’s

investment policy benchmark or starting portfolio.

All-Asset: These strategies typically have the widest and most-flexible mandate when

investing in ETFs across asset classes. In reviewing the portfolios, we designated this

attribute to strategies that consistently held more than 10% in “Other” assets as well as

in underlying equity and fixed-income securities.






Alternative: Alternative strategies typically seek returns uncorrelated to traditional equity

and fixed-income markets by attempting to remove one or more asset betas or return

drivers. Strategies with this attribute designation include long/short or other alternative

strategies, including currencies.

Balanced: The balanced option indicates strategies in which the return driver is a

combination of equity and fixed-income exposure on a dedicated, ongoing basis. These

strategies typically have a 30% to 70% allocation to equities.

Equity: The primary asset driver of these strategies is long or beta-type exposure to

equity securities. The use of leverage by the underlying ETF is ignored. These strategies

typically have at least a 70% allocation to equities.

Fixed Income: The primary asset driver of these strategies is long or beta-type exposure

to fixed-income securities. The use of leverage by the underlying ETF is ignored. These

strategies typically have less than a 30% allocation to equities.

Portfolio Implementation

This attribute gives insight into the investment manager’s process for implementing a

portfolio’s investment strategy. Selection decisions for this attribute are based upon a

review of the degree of changes both within and among asset classes in a portfolio. As a

result, changes to the cash/equity/fixed income/other allocation, as well as to a portfolio’s

U.S./non-U.S. exposure, are considered. The three classifications are hybrid, strategic, and

tactical.

Hybrid: This option indicates portfolios that use a combination of tactical and strategic

elements in asset allocation. Hybrid portfolios, for example, start with a stated

investment policy benchmark or asset allocation but allow for significant deviations of

exposure within and between allocations, similar to “core and satellite” or “hub and

spoke” operating models. Portfolio strategies that make significant use of options also

receive this classification.

Strategic: These are strategies that establish and maintain a long-term allocation plan

across either asset classes, sectors, or a combination thereof. These portfolios may

deviate from the plan in short-term periods based on identified opportunities but typically

to a smaller degree compared with tactical strategies. Strategies for which few historic

portfolios have been provided to our database initially default to this classification.

Tactical: Tactical strategies engage in short-term and potentially large changes in the

asset mix of a portfolio to capitalize on identified investment opportunities. These

changes are typically intended to be reversed or removed.

Primary ETF Exposure Type

The last attribute identifies the type of ETF typically used to gain exposure to the universe

and asset breadth attributes. Selection is based upon analysis of past portfolios and

information regarding a strategy’s starting universe or list of potential investments.

Broad Market: These are broad-based ETFs tracking diversified indexes such as the

Russell 2000 Index, S&P 500, or Barclays Aggregate Bond.






Sector: These strategies primarily use individual equity sector ETFs, such as those

focusing on financials, or more narrowly focused fixed-income ETFs to gain exposure

within the asset breadth attribute. A sector fixed-income strategy is typically one

focused on a single sector such as municipals or Treasury ETFs.

Country/Region: Similar to the sector option, these strategies use single-country,

regional, or currency ETFs focused on a geographical region and are typically found in the

international or global universe attribute.

All-Inclusive: All ETFs meeting the universe and asset breadth criteria for a strategy are

potential investments.

Morningstar’s attribute classification system gives decision-makers a significant new tool

for conducting research on these strategies and provides better expectations for potential

exposures across the ETF universe. For instance, a tactical strategy with a global, balanced

mandate that happens to have a large exposure to U.S. equities at one specific point in

time has a greater potential for change going forward compared with a strategy with a

U.S. equity mandate.

ETF Managed Portfolios U.S. Equity...

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