“Diversification Means Always Having to Say You’re Sorry”

At the Basis Northwest conference, Dave Nadig sat down with Caroline Barnett, an independent portfolio strategist who’s had a front-row seat to the ETF industry’s evolution, first as an analyst at ETF.com working alongside Nadig, then in BlackRock’s model portfolio group, and now advising firms on portfolio construction directly. 

The ETF landscape has changed tremendously in the last two decades. Fifteen years ago, the big challenge was helping advisors make sense of 50 large-cap ETFs. Today there are hundreds, sliced and diced by factor exposures, active strategies, and options overlays, blurring the old line between evaluating a traditional active manager and evaluating an ETF. According to Barnett, that complexity has created a persistent stumbling block: advisors picking a large-cap fund they like, a mid-cap fund they like, and a small-cap fund they like, only to end up with wildly overlapping exposures.

The discussion also touches on a number of traps that advisors tend to fall into, particularly around taxes and diversification. The idea that a properly diversified portfolio should always have something down at any given time is a myth that leads people to chase whatever’s hot. Private credit is her go-to recent example, where investors got excited about high yields without asking whether the exposure made sense in a tax-sensitive account. She also flagged a widely underappreciated wrinkle in fixed income: most systems report bond returns on a price basis rather than total return, making bonds look like losers even when income is holding portfolios up. 

Barnett also offers perspective on industry communication, arguing that asset managers who lean on stale pitches (five-star ratings, decades of “combined investment experience”, all of the usual hallmarks advisors are pitched with) are losing the battle for advisors’ attention. Meanwhile the ones actually winning assets are leading with market context: what’s happening now, how allocations should shift, and why that matters to the advisor’s clients. In her view, advisors aren’t really choosing one product provider anymore; they’re choosing one or two trusted partners who can speak across asset classes and help answer the allocation question first, before any individual product gets a look. It’s a shift from “here’s an interesting fund, how do I use it” to “here’s the allocation I need, now show me the best way to fill it”, and Barnett sees that reordering as the real dividing line between managers who are gathering assets and those who are stuck wondering why their calls aren’t getting returned.

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