Education is an ongoing consideration for the ETF industry as more investors consider this nifty investment tool as part of a diversified portfolio and look for ways to maximize the advantages of the ETFs.
“A lot of the benefits come from the exchange listing, so the ‘ET’ part of ‘ETFs’ brings investors a tremendous amount of benefits,” Anita Rausch, Head of Capital Markets at WisdomTree, said at the Charles Schwab IMPACT 2018 conference.
ETFs are considered a type of wrapper that wraps around a basket of underlying securities, providing investors instant diversified exposure to a group of investments.
Rausch explained that ETFs provide another layer of liquidity for investors. Since ETFs can be traded back and forth on the secondary market, it insulates the ETF portfolio. Investors are not directly involved with the underlying securities that the ETF covers, but ETF investors are still exposed to the movements of the underlying securities.
“So it creates an extra avenue of liquidity, especially in times of stress,” Rausch said.
Furthermore, due to the ETF’s structure or the way the investment tool is created, investors are able to enjoy greater tax efficiency. Rausch pointed out that ICI calculated about 10% of the average daily volume of an ETF – all the stuff you see trading on an exchange – translates into trading within the portfolio. This means that investors are exposed to low turnover.
“So there’s much less chance to create capital gains,” Rausch said.
Since 90% of ETF trades on an exchange are not involved with the underlying securities, investors also enjoy cost savings through more narrow spreads when they want to buy or sell their ETFs. Rausch added that KCG, a market maker, found that 90% of U.S.-listed ETFs with U.S.equity underlying traded cheaper than cost. In other words, 90% of the time for a U.S. equity ETF, it would be cheaper to buy the ETF as opposed to replicating the underlying basket holdings through individual stock trades.
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