An increasingly important investment vehicle for many advisors looking to capture all or part of the market while keeping expenses to a minimum has been exchange-traded funds (ETFs). While originally created as an efficient alternative to equity index mutual funds, advisors can now also steer their clients’ money into currency, commodity, real estate, and bond ETFs.
To get a handle on what’s happening in the world of ETFs–where assets grew 40% in 2006 to $422 billion, according to the ICI, Managing Editor Bob Keane chatted with Tim Meyer, ETF business manager for Rydex Investments, in February.
What should advisors consider when they’re looking at ETFs?
They should be looking at how the underlying index is constructed. There are now over 300 ETFs, and [they use] a lot of different benchmarks and methodologies. Our initial product was equal-weighted to the S&P 500 and what that offered for advisors was better diversification and the elimination of the single-stock risk. That’s really gone over well in the advisor community because it’s a story that’s easy to understand. It still gives access to the S&P 500 and allows further product diversification.
At a glance, many ETFs look the same. How can an advisor be sure she’s chosen the right one?