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
| Exchange-Traded Funds | Mutual Funds | |
|---|---|---|
| Bought and Sold | On an exchange throughout the day | Through the mutual fund companies |
| Sales Charges | None, though ordinary brokerage commissions apply | May have sales loads, purchase and/or redemption fees |
| Minimum Investments | None, an investor can buy one share | May have high minimum investments |
| Expense Ratios | Traditionally low | Dependent on Management Styles |
| Liquidity | Intraday | End of the day |
| Trading |
|
|
| Consequences of Purchases and sales Security prices & Tax Implications | Purchase and sales of shares on the secondary market generally:
|
Purchases and redemptions of a large number of share can:
|
| Transparency | Funds holdings published daily | Fund holdings typically published quarterly |
| Portfolio Investments | Assets are typically fully invested as there is no need to hold cash aside for redemptions | Mutual funds typically hold at least 5% of their assets in cash in order to handle day-to-day redemptions |
