ONE ON ONE: "I’m very much a believer in value investing, both large-cap and small-cap"

To day traders and market timers, exchange-traded funds are a godsend. The funds, which trade continuously through the day like stocks but look much like index mutual funds, have surged in popularity over the last several years, pulling in $31 billion in assets, a number analysts say will rise rapidly as more are launched.

But you don’t have to be quick on the trigger to enjoy the liquidity and tax savings associated with these funds. For financial planner David Yeske, using exchange-traded funds in clients’ portfolios is a no-brainer.

Mr. Yeske, 42, is a true buy-and-hold believer. He sees ETFs as a way to give clients of his San Francisco-based firm exposure to narrow sectors of the market without having to absorb the hefty taxable gains that sometimes come with mutual funds.

The American Stock Exchange pioneered the concept in 1993 when it introduced Standard & Poor’s Depositary Receipts, better known as Spiders. Since then, several dozen more have hit the market with more in the pipeline.

Other ETFs are Nasdaq 100 Trust Shares (called Qs or Qubes because their ticker symbol is QQQ), Webs (World Equity Benchmark Shares) and Diamonds, which track the Dow Jones Industrial Average.

While he’s not the only financial planner to incorporate ETFs in his mix, he was one of the first to try them on for size. Mr. Yeske’s peers aren’t surprised that he’d venture into new territory.

“He’s always on the cutting edge of things,” says Malcolm Greenhill, principal of Sterling Wood Financial, a planning firm in San Francisco. “He was using individual stocks when most managers were still using mutual funds. He would do the due diligence on the stocks himself and pick them for his clients.”

Q What’s the greatest appeal of exchange-traded funds?

A The greater tax efficiency — the fact that you don’t run the risk of a lot of taxable gains being released because the fund has to liquidate its portfolio due to shareholder redemptions. That same advantage exists with closed-end funds, but they still sometimes have big, fat capital gains. Since these are index-like sector funds, there’s no high turnover in the portfolio, so there’s no high capital gains. So you end up with some control. With individual stocks, you can harvest losses by selling individual share lots and matching them off with gains in a portfolio. But with mutual funds you often get a high degree of unexpected capital gains distributions.

Q What prodded you to get into them?

A Two things. One, I liked the ability to use the foreign funds, specifically the Webs, to structure my foreign market exposure in a way that left me with some control. The problem with so many international equity mutual funds, unless it’s an index fund — and even then sometimes — is that you don’t know from one moment to the next what country you’re exposed to. I’ve concluded that regional allocations have way too much of an impact on the performance of our international investments to leave those decisions in the hands of a fund manager.

Q Isn’t it more difficult constantly keeping an eye on ETFs more so than you would with mutual funds?

A Well, if you’re talking about an actively managed mutual fund, you better pay attention anyway because there are so many ways they can go wrong. With Webs, you have a fixed allocation. By and large, if you decide on a country allocation that you’re comfortable with, it could potentially require less attention on your part, if you’re making long-term decisions.

If I decide that long-term, I want my clients’ foreign exposure to mirror the relative weightings of foreign markets as they exist, then I’m not going to need to change that very often. If, on the other hand, I’m trying to use the precise control that the Webs give me as a way to engage in short-term, tactical market timing, then I’d have to pay a lot of attention.

Q I take it you’re a buy and hold person.

A Very much. I’m very much a believer in the efficient markets hypothesis. As a consequence, we tend to use more passive investments anyway — index funds and asset class funds — when building client portfolios. That’s one of the reasons that Webs, Spiders and other ETFs have been so attractive to us.

Q What’s your overall view of the market?

A I don’t believe it’s possible to make accurate short-term predictions so I don’t generally change my allocations to U.S. and foreign equities based on such but instead stick to a more neutral approach. Specifically, my equity allocations tend to run 65% to 70% domestic and 30% to 35% foreign. My foreign allocations are market-weighted — that is, in proportion to each country’s share of the total foreign market. Some of my clients’ money goes into Treasuries and bond funds. I consider fixed-income investments an important part of a broadly diversified portfolio.

Q How much of a portfolio do you typically put in ETFs?

A Currently it’s running about 20% to 25%.

Q Are you still a believer in mutual funds?

A Yes, for certain niches. Frankly, it’s been our experience, even with more passive open-end mutual funds, that you still lack control over taxable distributions. So we believe in using them when they are the best tool to give us exposure to a certain market niche, but we want to limit their use when they’d give us a negative tax impact.

Q Which ETFs are you most heavily invested in?

A We’re primarily using the S&P and mid-cap Spiders domestically, and some various mixes of the 17 Webs for overseas market exposure. Barclays Global Investors also have individual sector [ETFs], and on one occasion we used the tech Spider.

As a normal buy-and-hold investor, being able to buy and sell ETFs throughout the day is not normally an advantage, but I had a client [who] wanted exposure to technology applied immediately.

Q How do you pick what countries to be invested in with Webs?

A Although there are 17, I can get exposure with seven: the United Kingdom, Japan, Germany, France, Australia, Switzerland and the Netherlands. By and large those are among the largest foreign markets in terms of total capitalization.

Q What about the QQQ, which follows the Nasdaq 100?

A If you look at the Nasdaq 100, it’s got a heavy concentration of Intel, Microsoft, etc. Those are all represented in the S&P 500. So if you buy the S&P Spider, you’re getting all those stocks.

Q State Street Global Advisors plans to launch eight new funds that would focus, among other things, on Reits, large-cap value and large-cap growth, small-cap value and small-cap growth. Do these hold any interest for you?

A Yes. I’m very much a believer in value investing, both large-cap and small-cap. Right now the large-cap and small-cap part of our portfolios we implement using open-end mutual funds. So we’d be very interested in looking at these alternatives. And we have about 2% to 3% exposed to real estate, so the one focusing on Reits would hold interest for me

Snap Shot

David Yeske, 42, principal, Yeske & Co. Inc. in San Francisco

Assets under management: $50 million

Business founded: 1990

Education: B.S. in applied economics and M.A. in economics from University of San Francisco; doctoral candidate in finance at Golden Gate University; Certified Financial Planner; national board member, Financial Planning Association