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Exchange-Traded Funds are and have been exploding in popularity.  ETFs hit the scene in 1993 with a few million bucks devoted to a single fund designed to track the S&P 500.  Today, the ETF world has more than $2 trillion devoted to it and offers investors asset class exposure of all types.  The growth of this industry has been incredible and that growth is  in the early stages.  Today we wanted to highlight a few characteristics that are attractive about these investment vehicles.

The following are features of Passively Managed ETFs:

  • Transparent –  Passively Managed ETFs make their holdings available on a daily basis.  You don’t have to wait for monthly or quarterly transparency that may have stale information…you know what you own now.
  • Tax-Efficiency – ETFs can generate tax savings from their structure.  Capital gains are typically lower due to the in-kind process of creating and redeeming shares.  That can get technical, I know. We will have a future post explaining exactly what that means…but for now, just know the structure of an ETF leads to potentially lower capital gains realized.
  • Exact Exposure – Whether you are an institution or a private investor looking for exact exposure to a certain asset class, there is an ETF out there to help.  This ability is helpful when forming a diversified portfolio.
  • Low Cost – Passively managed ETFs typically have lower fees than actively managed mutual funds.  Most passively managed ETFs are designed to track an index which is not as costly as active management.  Plus, tracking an index is a great way to minimize behavioral biases..there is no room for discretion.

We utilize ETFs heavily in our day to day operations.  The ability to control exact exposure, minimize costs, and know exactly what we own are big reasons why that’s the case.  We believe the value of these vehicles, as a piece of the total portfolio puzzle, will continue to be realized.  That’s why we are launching our own ETF in June.  An ETF is the most efficient vehicle for us to deliver our strategy to investors.

The ETF industry is here to stay and for good reason.  It will be interesting to watch how the financial services industry that’s still full of mutual funds with sales loads adapts to this growth.