Accessing the modern investment landscape’s full potential can be difficult when passive strategies often dominate. Against this backdrop, Touchstone Investments stands out with its Distinctively Active approach to managing exchange-traded funds (ETFs). With three decades of experience in active management through mutual funds, the firm has successfully transferred this expertise to its ETF lineup, offering investors a compelling alternative to traditional index-based investing.
Matt Barry, VP of Product Management & Head of Capital Markets at Touchstone, recently joined Wealth Advisor Managing Editor Scott Martin to explore his firm’s range of actively managed ETFs that aim to provide distinctive and dynamic investment strategies with the potential to outperform passive benchmarks over the long term.
The Case for Active Management
Touchstone’s methodology challenges the conventional wisdom about active management’s limitations. “I think the conventional wisdom about active managers has been overstated,” says Barry. “Lumping all active managers in the same bucket can be a mistake.”
The firm’s philosophy is grounded in academic research that identifies specific characteristics associated with managers’ ability to potentially outperform their benchmarks. This research-based approach forms the foundation of Touchstone’s portfolio construction methodology.
A Distinctive Business Model
Touchstone’s operational model sets it apart in the investment management landscape. “Our model is we hire best-in-breed, institutional-caliber sub-advisors to put on our strategies,” Barry explains. “These are managers that have, in the institutional space, decades-long track records of generating really compelling performance.”
These sub-advisors are tasked with building concentrated “best ideas” portfolios, which are then implemented through both Touchstone’s traditional mutual funds and its seven active ETFs.
The ETF Lineup: Strategic Diversification
Touchstone’s ETF offerings represent carefully chosen market segments where active management can add particular value. The firm’s initial 2022 launch brought several strategic products to market, beginning with the Dividend Select ETF (ticker: DVND), which applies a dividend tilt to US large-cap stocks. Alongside this, Touchstone introduced its US Large Cap Focused ETF (ticker: LCF), combining valuations and barriers to entry to create a high-quality large-cap blend portfolio.
In the fixed income space, the firm launched its Ultra Short Income ETF (ticker: TUSI), featuring a high-quality portfolio with a duration of under one year and an emphasis on securitized income investments. Rounding out the initial offering was the Strategic Income ETF (ticker: SIO), designed as a best-ideas multi-sector bond portfolio.
The Power of Concentration
One of Touchstone’s key differentiators is its understanding of portfolio concentration. Barry emphasizes this point: “When we do look at the active management universe, there are a lot of managers over there that don’t necessarily have the characteristics that define distinctively active.”
The industry faces two significant challenges that Touchstone actively works to avoid. The first is asset bloat, as Barry explains: “If you’re managing tens or hundreds of billions of dollars, it can be very difficult to build a portfolio that looks different from the benchmark. And we know that being different from the benchmark is a prerequisite to outperforming the benchmark.”
The second challenge involves over-diversification. “We also see a lot of managers that have what we believe are too many holdings in the portfolio. If they do have that asset load, building a portfolio that has hundreds of securities potentially can be very difficult for that manager to outperform.”
Studies in the field support Touchstone’s concentrated approach. “When you look at the academic research about the amount of diversification or the amount of holdings that are needed to obtain a reasonable amount of diversification, it’s typically not dozens or hundreds of securities,” Barry notes. “It’s 20 to 30 securities that provide pretty good diversification, but that lets you get access to a manager’s best ideas. I think most investors would rather have a manager’s top 20 or 30 best ideas than their 200th best idea.”
International Innovation: The TDI Strategy
Among Touchstone’s noteworthy offerings is its Dynamic International ETF (ticker: TDI), which exemplifies its robust portfolio management processes. “Los Angeles Capital is the sub-advisor. They pick a portfolio based on their investor preference theory,” Barry explains. “The Dynamic in the name of the ETF is a critical word there. It’s constantly changing to reflect what is today’s market environment, what are investors showing preference for in types of stocks and factors.”
This dynamic approach is particularly relevant in current market conditions. Barry notes that although recent years have favored U.S. large-cap technology stocks, “that’s not always the case. We’ve seen plenty of market environments where international has worked, where small caps work. So, being married to the same factors that worked in their most recent history can result in some risks that investors might not be aware of.”
Innovation in Fixed Income: The TSEC Strategy
A notable recent addition to Touchstone’s ETF lineup is its Securitized Income ETF (ticker: TSEC), managed by Fort Washington Investment Advisors. Barry describes this fund as “a short-term bond portfolio that emphasizes securitized income—and compared to other areas of the fixed income market, like the corporate high-yield market, that portfolio is capable of having a higher-quality bias while generating really healthy yields comparable to US corporate high-yield yields.”
The strategy addresses a common portfolio imbalance: “Securitized is an area where we see a lot of advisors and clients might be underweight. They’re too tilted towards corporates and Treasuries, while securitized is a big part of that fixed-income universe.”
Capacity Management: A Key Differentiator
Touchstone’s ability to maintain its distinctive approach is partly a result of careful capacity management. “Because of the size of our ETF platform and our sub-advisors, we manage capacity. We’re able to offer portfolios that are more concentrated and deliver those best ideas, which we believe in turn can result in really good investment results,” Barry says.
Looking Forward
The investment landscape continues to evolve, and Touchstone’s thoughtful active management approach positions it well for changing market conditions. Barry emphasizes the importance of forward-looking analysis, particularly in international markets: “The world is constantly adapting. What factors worked the past few years are not necessarily the factors that will work the next few years, and being married to certain countries or sectors or factor exposures may work at times, but you probably don’t want those to be stagnant.”
Conclusion
Touchstone’s Distinctively Active investment strategies offer a compelling alternative to passive investing, particularly for advisors seeking to optimize their clients’ portfolios. Through careful sub-advisor selection, concentrated portfolios, and dynamic management, the firm’s ETF lineup provides access to institutional-quality active management across multiple asset classes. As markets continue to evolve, this approach may become increasingly relevant for advisors looking to generate alpha while managing risk effectively.
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Additional Resources
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Disclosures
Investment return and principal value of an investment in a Fund will fluctuate so that investor's shares, when redeemed, may be worth more or less than their original cost. All investing involves risk.
Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one on the resources section or call Touchstone at 833-368-7383. Please read the prospectus and/or summary prospectus carefully before investing.
Touchstone ETFs are distributed by Foreside Fund Services LLC
A registered broker-dealer and member of FINRA.
Wealth Advisor and Touchstone Investments are not affiliated. Wealth Advisor and Foreside Fund Services, LLC, are not affiliated.
