Note: This article is courtesy of Iris.xyz
By Shundrawn A. Thomas
Investors’ use of ETFs has significantly evolved since the product first launched in the early 1990s. Yet, despite that growing popularity, many investors – regardless of their level of sophistication – do not have a thorough understanding of the total cost of ownership of ETFs. The constant evolution of competing product strategies across the last few years has only added complexity to the issue.
We’ve prepared this paper to help advisors and investors better examine all of the costs that impact the ETF investing experience – advisors may want to share this paper with their clients. Our objective is to assist investors by explaining the differences between explicit, implicit and opportunity costs; highlighting how these costs interact with one another in practice; and demonstrating ways to evaluate different costs when selecting an ETF product.
THE EVOLUTION OF ETF USE
Early ETF adopters were institutional investors who saw the benefits of tax efficiency and intraday trading. Initially, ETFs were used to address short-term needs, such as asset transition management or “parking” a large but temporary amount of cash (cash equitization). Consequently, ETFs often only served as trading vehicles with the potential to provide investors with liquidity and low costs during periods of active trading.
As passive management gained in popularity, however, strategic investors who wanted tax efficiency and flexible trading attributes in their long-term investments began to adopt a variety of broad, market-weighted ETFs as core portfolio holdings. While the costs of holding and trading ETFs still mattered, these strategic investors also began to focus on other perceived costs that could potentially create performance drag over time — costs such as asset turnover, capital gains and how closely the fund tracked to its underlying index.
More recently, the emergence of non-traditionally weighted indices has given strategic investors greater choice and precision to tailor portfolio implementation to their specific investment views or goals. That development, too, brings with it additional costs to consider.
Click here to read the full story on Irix.xyz.[related_stories]