How Advisors Can Use ETFs To Build Portfolios

Below is a portion of an interview I did with a financial advisor focused website Advisor to Advisor that published this week. To view the whole piece, click here.

New ETFs seem to be coming out every week in 2015, should investors be patient or be giving these new products a look? So, new ETFs have some advantages and some disadvantages the advisor has to consider, so let’s start with the disadvantages. We are covering an ETF typically around three months into its history, some of these new ETFs follow rules, they tell you what those rules are going to be using what’s called a smart beta factor in whether it’s volatility or dividends or momentum, valuation.

Because we have analysis of those underlying stocks we think we can provide coverage of them in a smart way and in a timely way. But ETFs that are new tend to be small, they tend to trade less frequently, and they tend to cost more as a result when you’re making trading requests, so we think investors need to not only understand what’s inside the portfolio and understand how that ETF is trading. You’re going to sell it for clients and it’s going to cost you five or ten or fifteen cents from a spread between buying and selling, that’s pretty wide and you want to compare it to something that trades more frequently that perhaps trades for just a penny.

Right, and I guess kind of related to that, advisors are being challenged on multiple fronts today, the 800-pound gorilla in the room is DIY (Do-It-Yourself) investing platforms touting the benefits of low cost index funds. Sometimes advisors feel that simply recommending index funds doesn’t provide them any type of competitive advantage over these DIY platforms. Isn’t ETF investing just another type of plain vanilla indexing that anybody can do?

An index based product is by nature a passive product, in that it follows an index like the S&P 500 Index or the Russell 1000 Index, and that index doesn’t change on a regular basis. But advisors can use ETFs to tilt their client portfolios and trade their client portfolios to reflect different risk-reward opportunities. So they can be active using passive products and provide expertise and advice for their clients instead of just buying it and holding it forever. Yes, the do-it-yourself investor platforms that set it and forget it using low cost ETFs are hard to compete with

Instead of using active mutual funds that cost more and where you don’t have control of what’s inside the portfolio, an ETF that focuses on S&P 500 growth or that focuses on the Russell 1000 value can allow you to tilt your client’s portfolio. Whether you think growth or value is a better place to be, orsmall cap exposure makes more sense in the risk-on environment that we’re in today.

Find more best practices from Advisor to Advisor here.

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