ETFs
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What are ETFs
- As their name suggests, exchange-traded funds (ETFs) are investment funds that trade openly on the stock exchange. Although they have become increasingly popular of late, ETFs have actually been around since the late 1970s.
- ETFs are structured similarly to mutual funds in that each share that an investor purchases represents partial ownership of an underlying group of securities. Investors in both mutual funds and ETFs can achieve diversification through a single purchase. However, ETFs can be bought and sold on an exchange throughout the day, whereas mutual funds can be bought or redeemed from the mutual fund company only after the close of trading.
- Thus, ETFs combine the diversification potential of a broad portfolio with the simplicity of trading a single stock on an exchange.
Why use ETFs
ETFs offer a number of potential benefits that can make them extremely effective for helping investors reach specific long-term goals: Diversification, Low fees and no sales load.
- Intraday liquidity
- Tax efficiency
- Transparency
- Ability to access targeted asset categories in a single transcation
How ETFs are utilized in SMA/UMA Accounts
ETFs can be used within Separately Managed Accounts (SMAs), giving clients benefits such as portfolio customization, control, transparency, tax optimization and other factors. The latest innovation is Unified Managed Accounts, which offer even more flexibility than SMAs. With a UMA, clients can obtain a diversified, tax-aware, multi-asset portfolio in a single account tailored to meet an individual client’s needs. Financial advisers can select ETF Model Solutions as a Third Party Strategist and include our models in the SMA/UMA account programs for their clients.
ETFs vs. Mutual Funds
| Category | Exchange-Traded Funds (ETFs) | Mutual Funds |
|---|---|---|
| Bought and Sold | On an exchange throughout the day | Through mutual fund companies |
| Sales Charges | None, though brokerage commissions apply | May have sales loads, purchase, and redemption fees |
| Minimum Investments | No minimum, can buy one share | May have high minimum investments |
| Expense Ratios | Traditionally low | Dependent on management styles |
| Liquidity | Intraday | End of the day |
| Trading | Intraday trading and special orders possible | Trades executed once per day, no special trading orders |
| Consequences of Purchases and Sales | Do not affect security prices | Large transactions can impact security prices and fund NAV |
| Tax Implications | Do not trigger capital gains or losses on underlying securities | May trigger capital gains and impact tax efficiency |
| Transparency | Fund holdings published daily | Fund holdings typically published quarterly |
| Portfolio Investments | Fully invested, no need to hold cash for redemptions | Holds at least 5% in cash for redemptions |