How Can ETFs Complement Your Firm's SMA Offerings?

August 12, 2024 EDT

Discover the powerful combo of ETFs and SMAs and how their complementary strengths allow you to offer more comprehensive, flexible, and tailored investment solutions to your clients.

As client needs evolve and market complexities increase, the ability to offer diverse, flexible investment vehicles has become a key differentiator for many firms. Enter the powerful combination of ETFs and SMAs.

ETFs and SMAs: What are They?

When considering expanding your firm’s offerings, it's crucial to understand the unique benefits and differences of ETFs and SMAs. They each offer distinct advantages, so let's break them down to showcase their differences and how they can fit together to better serve your clients.

Exchange-Traded Funds (ETFs)

ETFs are versatile. They're registered investment companies (RIC) that trade on stock exchanges, offering a blend of diversification and tradability, and can simplify your existing strategies with their unique structure. They also can benefit your fee-sensitive clients and expand your business reach to those who don’t have the minimum assets needed to invest in SMAs. Here's what else makes them stand out:

Tradability: ETFs can be bought and sold throughout the trading day, just like stocks.
Transparency: A level of transparency and liquidity may appeal to end investors since ETFs can offer exposure to more challenging asset classes.
Tax efficiency: Thanks to their clever creation/redemption mechanism, ETFs can potentially minimize or eliminate capital gains distributions.
Diverse exposure: Want broad market access or niche strategies? ETFs have got you covered, all in a single trade.

Separately Managed Accounts (SMAs)

SMAs, on the other hand, are a portfolio of individual underlying securities. These personalized portfolios are managed by professional asset managers. Here's what makes them distinct:

Direct ownership: Your clients own the individual securities within the account.
Customization: SMAs may be tailored to an individual’s goals and preferences.
Tax management: While not as inherently tax-efficient as ETFs, SMAs offer tax-loss harvesting which occurs in the account. Capital gains are likely unavoidable as all gains are taxable.
Periodic Rebalancing: Asset managers can rebalance to match client needs or respond to market shifts.

Comparative Advantages of ETFs and SMAs

Now that we've covered the basics, let's examine how ETFs and SMAs compare in key areas. Understanding these comparative advantages will help you effectively leverage both options for your clients.

	ETFs	SMAs
Ease of Implementation	When it comes to simplicity, ETFs take the cake. With just one trade, you can implement an entire investment strategy or gain exposure to a broad market index. ETFs have only one portfolio to manage, offer in-kind creation/redemptions, and custom baskets may be used.	SMAs require more hands-on management. Each account is individually constructed, which means more initial legwork but greater control over the portfolio's composition.
Tax Benefits	ETFs' unique creation/redemption mechanism often reduces or eliminates the distribution of capital gains. This can be a significant advantage for tax-sensitive clients.	Strategies can be implemented at the individual security level for an individual’s preferences. Flow-related trading in the account can initiate taxable events, with capital gains realized within the SMAs.
Ownership	ETFs offer flexibility in terms of trading since investors own shares of the ETF. By buying the ETF, advisers can invest their client’s money in a diversified portfolio with just one ticker. ETFs also offer exposure to a wide range of asset classes and strategies, from broad market exposure to niche sectors.	SMAs require investors to keep direct ownership of underlying securities. Asset managers can offer a degree of customization to their clients with SMAs – whether it's accommodating specific ESG preferences, managing around existing positions, or targeting precise factor exposures.

To put it simply, ETFs can be easier to implement and may offer inherent tax benefits since they operate through a single security that provides direct exposure to underlying securities, while SMAs hold individual securities and could trigger taxable events for each trade.

Ready to take the next step in enhancing your firm's offering?

The complementary strengths of ETFs and SMAs create a powerful synergy, allowing you to offer more comprehensive, flexible, and tailored investment solutions to your clients.

By leveraging the ease of implementation, tax benefits, and broad market exposure of ETFs alongside your SMAs, you're equipping your firm to meet diverse client needs.

Want to talk further? Don't navigate your next ETF alone. Reach out to Exchange Traded Concepts for guidance on seamlessly integrating ETFs as an investment solution. Our team can provide tailored guidance to help your firm leverage the full potential of ETFs while complementing your existing SMA offerings.