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Overcoming Challenges Tied to ETFs

Advisors explain the concerns they have with the product and how they tackle them with clients

Two-thirds of advisors surveyed indicate that their clients are unfamiliar with ETFs, and more than half of respondents admit they themselves do not fully understand ETF structures and have at least some difficulty evaluating similar offerings.

 

These and other findings were revealed in an online poll conducted by ThinkAdvisor.com and sponsored by OppenheimerFunds.

About 35% of advisors polled have concerns about liquidity mismatches, and 34% believe there is not enough objective research available on ETFs. Over a quarter prefer index mutual funds, while 22% worry about regulatory uncertainty in the ETF space.

Many wealth managers interviewed say clients, when they do ask about ETFs, just want to know what the acronym represents. Once advisors explain the products to them, the investors let them take the reins in creating and managing the portfolios.

As one manager states, “It never fails to amaze me how many clients have no interest in wading into the weeds.”

Discussions with clients are “tied to tax efficiency, transparency and the clarity of ETFs, and knowing what you own,” according to Mark Butterworth, president of Butterworth Financial in Tulsa, Oklahoma.

Since his group works with managed or actively traded ETFs, “We walk through an explanation of what we think is value-added for the clients’ circumstances. We explain to them that ETFs are like individual stocks (traded throughout day) versus a mutual fund that is priced at end of the day,” Butterworth says.

Properly evaluating ETFs “can be quite a challenge,” explains Alan Myers, president and senior portfolio manager of Aerie Capital Management in Baltimore. 

Myers usually starts with a “relatively” neutral source, such as Morningstar, and reviews its commentary and information. Next, he checks performance over two- to 10-year periods and determines which are most consistent.

Once he has narrowed down his search, the advisor checks the ETF provider websites for additional details.

“I am primarily looking for information on how the index is constructed, how often it is rebalanced, what the turnover is for the index, performance information, and the length of time for that performance history,” he says.

ETF Strategies Preferred by Advisors

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