A month removed from both the holiday season and year-end tax adjustments for client portfolios, the time to follow through on lingering New Year’s resolutions to add ETFs for client portfolios is now. There are a number of items to assist the transition, but it helps by organizing them into two primary areas: making the investment decision and trading (buying and selling shares).
Investment Decision Process
This is the easier part. Utilize the same process for evaluating mutual funds. Avoid getting preoccupied comparing index, smart beta and active ETFs. Instead, examine the specifics of an investment strategy to uncover critical information. For example, determine how much developed versus emerging markets exposure an international ETF may hold.
Indexes have different construction processes, and of course, an active ETF manager can use discretion to effectively implement an investment strategy—subject to the prospectus’ limitations. Reviewing a manager’s experience remains essential. For most ETFs, that can be discovered in the construction of an index. Remember that smart beta is still an index, and the manager cannot make changes to improve a strategy’s performance. As many active ETFs are new, learning a portfolio manager’s history of managing money is important.
New ETFs should not necessarily be avoided. Advisors typically want to carefully watch how a manager performs and adheres to an investment strategy before making an allocation. Unlike mutual funds, ETFs provide daily transparency and intraday liquidity that ensures a manager is constantly holding the types of securities expected for an investment strategy. Plus, factor in no redemption fees—only the commission costs to exit an ETF anytime desired.