Kicking Off Inside ETFs With the Ultimate Guide to the Fundamentals of ETFs

Yesterday, I had the pleasure of helping kick off the Inside ETFs conference in Florida along with Jillian DelSignore, Mo Sparks, and Adam Shoffner during an InsideETFs 1.0 Workshop. The goal of the session was to give financial advisors sufficient insights into the basics of ETFs to set them up for the rest of the conference. 

We started with some of the foundations that helped to turn the U.S. ETF industry into a $7 billion market at the end of 2021, namely relatively low costs to own and trade an ETF; strong liquidity to gain access to a wide array of investment styles; the ability to target allocations without style drift risk; and tax efficiency aided by the creation and redemption process.

During the session, we also covered some of the hot topics thus far in 2022, such as the growing number of actively managed ETFs, how advisors have sought income through high dividend yielding strategies like the ALPS Sector Dividend DOGS ETF (SDOG) and the iShares Core High Dividend ETF (HDV), and how the SEC and the financial industry are taking a closer look at what is inside ESG strategies like the SPDR S&P 500 ESG ETF (EFIV).

However, we made sure to cover due diligence topics that advisors need to sort through across the growing universe of products available. Ahead of the conference, VettaFi surveyed advisors attending a webcast that we held last week about actively managed ETFs. One of the questions we asked was, “What characteristics do you place the greatest emphasis on when selecting an investment strategy for your clients’ portfolio?” The top three selections were “a good fit with existing portfolio mix” (39%), “performance” (25%), and “methodology” (21%), with issuer reputation and cost further behind.

Many ETF-focused advisors are using actively managed ETFs to complement a portfolio that already owns low-cost, index-based equity and/or fixed income ETFs. They are willing to pay a slight premium fee to augment their portfolios to either generate higher returns in bullish times or reduce the risk profile in bearish times, but they want to dig into what makes a fund’s methodology distinct. 

With the transparency provided by ETFs, advisors can dive into the holdings to understand how two similar-sounding funds can be different whether they are index-based peers like the iShares MSCI USA Min Vol Factor ETF (USMV) and the Invesco S&P 500 Low Volatility ETF (SPLV), or active ones like the First Trust Senior Loan Fund (FTSL) and the SPDR Blackstone Senior Loan ETF (SRLN).

Like me, my fellow panelists were optimistic about the future adoption of ETFs by advisors and what the industry has in store. As more advisors learn the basics about ETFs and gain comfort shifting client assets away from more expensive, less tax-efficient mutual funds, end investors will benefit. However, advisors need to understand what they are buying. 

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vettafi.com is owned by VettaFi, which also owns the index provider for SDOG. VettaFi is not the sponsor of SDOG, but VettaFi’s affiliate receives an index licensing fee from the ETF sponsor.