Since roughly 2014, the number of domestic mutual funds has remained static at around 8,000, whereas the number of exchange traded funds (“ETFs”) has increased from approximately 1,500 to more than 2,100. The relative growth of ETFs compared to mutual funds is certainly evidence of the benefits of ETFs. Rather than just following the crowd and rushing into an ETF investment, intelligent investors will look more deeply into those benefits to understand what is behind their growing popularity.
Unlike other investment advisors that might channel investors into a small range of investment options, the 6th Avenue Team at Ingalls & Snyder, LLC begins every client relationship with an in-depth analysis of a client’s objectives for wealth management. We take the time to explain the benefits and drawbacks of every investment opportunity, including ETFs, within the context of each individual investor’s goals. We will recommend ETFs only if the benefits they offer are fully consistent with those goals.
What Are The Basic Benefits of ETFs?
From a broad perspective, investment advisors generally point to three basic ETF benefits:
1. Tax Efficiency.
Unlike stock mutual funds that pay out taxable gains distributions according to schedules that the fund’s shareholders do not control, ETFs generally do not pay those distributions. ETF shareholders control when and how they take capital gains by deciding when they will sell their ETF shares. With some ETFs, the tax advantages that investors realize from this control are offset by higher fund expenses. Again, as with all investment assets, the key to optimizing the tax efficiency benefits of ETFs is to utilize ETF investments within the structured context of a well-formed investment strategy
The growing number of ETFs gives investors the opportunity to invest in a broad swath of asset classes and market sectors. This diversification minimizes an investor’s exposure to factors that might have an adverse effect on some asset and sector classes over others. To optimize this ETF benefit, investors need to verify the assets that are included in the ETFs that they include in their portfolios. Different ETFs may invest in similar sectors or asset classes notwithstanding different descriptions of their investment strategies.
Actively-managed ETFs are legally required to disclose their holdings on a daily basis. By custom and convention, the greater majority of ETFs also publish a daily disclosure of their holdings. ETFs also trade in real time, and investors know the exact value of their ETF positions at all times during a trading day, rather than having to wait for an end-of-day settlement. These ETF features give investors an unprecedented opportunity to see exactly what assets and industry sectors they are investing in on a real-time basis. This transparency further helps investors to avoid unplanned risks and changes in investment strategies that may be more common with mutual fund investments.
Achieving ETF Benefits Within a Structured Investment Portfolio
Investors can optimize their ETF benefits with planning and strategizing that includes:
– Long-term thinking;
– Considering both international and domestic investment opportunities;
– Altering the relative portfolio balance of stocks and bonds as a function of Federal Reserve interest rate moves and other events that affect prevailing interest rates;
– Avoiding emotional responses to sudden market shifts;
– Devising both core and strategic investment holdings that maintain portfolio value while taking advantage of momentary opportunities to add new value.
Professional investment advisors will help even the most sophisticated investors to create an objective wealth management plan that accounts for these and other factors. To the extent that plan includes ETFs, a professional advisor will also add further value to the tax efficiency, diversity, and transparency that ETFs can provide.
The investment advisors on the 6th Avenue Team at the New York offices of Ingalls & Snyder have developed a keen understanding of the benefits of ETFs and of how to incorporate ETFs into our clients’ portfolios in ways that mesh with their unique investment objectives.
Please see our website or call our midtown Manhattan offices to speak with one of our financial consultants and for more information about how the benefits of ETFs can help your portfolio to grow with.
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