September 08, 2008 at 2:00 pm by Tom Lydon
More and more advisors are making exchange traded funds (ETFs) a factor in their businesses. If your investments are handled by an advisor, it could have implications for your returns, risk and tax bill.
ETFs have given investors and advisors alike the opportunity to lower expenses, add greater diversification to portfolios and provide clients with better returns with lower risk.
There are more than 800 ETFs available, so investors and advisors can get exposure to a variety of investments, says Jonathan Burton for MarketWatch. If you need a fund that tracks the S&P 500, that can be accessed with the SPDRs (SPY). Likewise, there are ways to get exposure to small-caps, currencies, solar power, nanotechnology and more.
The range of choices available are just one of several reasons advisors have been moving into ETFs. Many are frustrated with actively managed mutual funds, which generally have big expenses ratios and a poor track record at beating the market.
Burton cautions investors to be mindful of taxes and trading costs, though. How often are you adding new money? ETFs have transaction fees, just like stocks do, and if you’re dollar-cost averaging in small amounts, ETFs might not make the most sense.
But ETFs are very tax-efficient – they don’t generate capital gains until the fund is sold. Advisors can be hands-on about managing the tax bite, selling losers to offset any gains.
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