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
  • Ability to trade intraday
  • Special Trading orders are possible:
  • Trades only executed once per day
  • Special trading not possible
  • Trading frequency restricted
Consequences of Purchases and sales Security prices & Tax Implications Purchase and sales of shares on the secondary market generally:

  • Do not affect security prices
  • Do not impact tax efficiency
  • Do not trigger capital gains or losses on the underlying securities
Purchases and redemptions of a large number of share can:

  • Impact and underlying security prices as the fund buys or sells shares
  • Impact the fund’s NAV and returns
  • Trigger capital gains or losses on the underlying securities
  • Affect the fund’s tax efficiency
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