Over the years, the popularity of investing in exchange traded funds (ETFs) has been rising on the declining popularity of mutual funds. Advisors have taken notice and are seeking ways to help benefit investors by including ETFs in client portfolios.
Michale Krause for Seeking Alpha helps explain how advisors can provide more effective financial planning services by utilizing ETFs in client portfolios.
ETFs now make up almost half of all equity index assets and they have mostly gained market share at the expense of actively managed mutual funds. Popularization of index investing, innovation and ETF advertising coupled with changes in compensation practices in advisory businesses and public ire over mutual fund records have helped spearhead ETFs in the markets.
While many advisors have adopted ETFs in client portfolios, many still believe they need to “justify their existence” through selecting and monitoring active managers or single stocks, which Krause believes to be a mistake.
Of the many benefits ETFs offer, transparency is often overlooked. Active mutual fund managers know what is in the portfolio, but the investor does not. As a result, managers may overweight a specific area of the market for their own reasons. [Tom Lydon Talks ETF Growth on CNBC.]
By using ETFs, advisors can take control of a clients portfolio to tailor them to an optimal fashion. This way the advisor has a complete view of a client’s overall investment goal and he or she would not have to explain why the fund performed as it did because the client would be on the same page.
Additionally, with all index funds, including ETFs, the investments will try to reflect an underlying benchmark, which helps negate the need for a manager to tend to the day-to-day portfolio management. Essentially, a portfolio of ETFs is on auto-pilot. Consequently, the advisor does need to monitor, analyze and adjust their client portfolio according to the objectives. [Active ETFs Meet Innovation.]
For more information on actively managed funds, visit our actively managed ETFs category.
Max Chen contributed to this article.