It appears that exchange traded funds (ETFs) continue to draw attention and are convincing more and more people that they will be the future of the investment industry. More and more frequently these days, we’re seeing people who are finding new and creative uses for the innovative products.
Herb Morgan of Efficient Market Advisors beleives that the future of the retail separately managed account (SMA) industry will be shaped by those companies that utilize ETFs.  He believes that the underlying characteristics of tax efficiency, low cost and diversification of ETFs will be the reason why they will become that niche needed by SMAs to shine.

In general, an SMA includes custody and clearing fees in its wrap fee. But often money managers are often forced to place trades with the sponsoring broker-dealer and principal trades can then be marked up or down essentially redistributing wealth from clients to brokers-dealers.

This is where managed ETF portfolios come in and dramatically cut transaction costs.  Instead of having various accounts to achieve manager diversification, investors can hold every asset class in one account by simply holding one ETF for each desired class.

To make it even better, the utilization of ETFs cut down on accounting and tax fees because of their low incidence of capital gains distributions.  Additionally, by indexing each asset class with an ETF, an investor can reduce the possibility of manager error or failure.

It definitely seems like the future for ETFs remains very bright.

For more stories on ETF education, check out our education category.

Kevin Grewal contributed to this article.

Tags: ETF 101, Indexing