The benefits of the ETF structure have been recognized by investors ranging from the DIY retail crowd to large institutions, and it is easy to see why.
Standing at over $6.5 trillion dollars, the US-listed ETF industry has gone decidedly mainstream, with ETFs finding their way into portfolios of all sizes. The benefits of the ETF structure have been recognized by investors ranging from the DIY retail crowd to large institutions, and it is easy to see why. Compared to other types of investments such as separately managed accounts (SMAs) or mutual funds, the ETF wrapper provides multiple advantages that benefit investors of all stripes.
Simpler Implementation
Compared to SMAs, ETFs provide a level of ease and simplicity. Rather than needing to purchase every underlying holding within the separately managed account, advisors have a one-trade option to execute their investment strategy within client portfolios. By buying the ETF, advisors can invest their client’s money in a diversified portfolio with just one ticker.
Liquidity, Even for Illiquid Asset Classes
While mutual funds offer this same one-ticker benefit, ETFs are traded throughout the day similar to stocks, providing a higher level of liquidity. This means that investors are getting the most accurate pricing and can get in and out when they want, much faster than they would be able to with either a separately managed account or mutual fund. This benefit holds true even for relatively illiquid asset classes like small caps or alternatives.
Tax Efficiency
One other feature that makes ETFs an attractive choice are the potential tax benefits. Due to the unique creation/redemption mechanism used by ETFs, these types of funds tend to be more tax-efficient while also offering a level of transparency that appeals to end investors who want to know what they are invested in.
More Accessible at a Cheaper Cost
Along with these tax benefits, ETFs tend to have lower fees and expenses than either SMA’s or mutual funds, keeping more of the client’s money invested in the market. ETFs also do not have a minimum investment size, making the benefits of the investment vehicle available to clients of all sizes.
While advisors who are considering converting their SMA into an ETF should already have a large base of assets, converting your strategy to a publicly-traded ETF provides the opportunity to market to a wider audience of potential clients.
Despite these benefits, ETFs won’t be the right investment vehicle for everyone. Some clients may prefer to own the securities within their portfolio directly or require customization that isn’t possible within the ETF wrapper.
However, converting your strategy to an ETF can provide significant benefits to some clients while also making it easier to market your strategy on a wider basis.
If you’re interested in learning more, contact us to discuss how your strategy could benefit from transitioning into an ETF.
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