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March 28, 2016 at 08:00 PM
We’re constantly reminded of the need for great ETF education. Most astute advisors know the successful statistics of the growth of ETFs. Over $2 trillion in assets have flocked into exchange-traded funds in the United States alone for a product structure that is just over 20 years old. That’s not just impressive growth, it’s the most successful commencement of any product structure in history. Even with that success, the size of the ETF market remains roughly one-tenth of the size of the mutual fund market.
As much as ETFs are touted for their ease of use — similar to buying or selling a stock — there are similar attributes of the pooled investment approach seen with mutual funds. Key differentials, though, for ETFs are their trading control and ease of accessibility through an exchange, where they trade on a value based on other underlying securities that also trade on an exchange. Even an exchange-traded company such as Berkshire Hathaway, which also invests in many public securities, is both valued and traded differently from ETFs.
Retail investments are typically marketed as easy to access and use for an investment portfolio. The simplicity is evident if someone wanted to buy shares of a major blue chip company via a Fidelity or Schwab brokerage account, which once carried a tag line of “point, click, invest.” The same concept applies if someone wants to purchase shares of an ETF from firms such as iShares or State Street, where you may have heard a marketing slogan such as “one-click diversification.” Nevertheless, despite such simplified accessibility, it’s imperative for advisors and clients to remember that you are still investing in the market, and all its associated risks stand the same.
In a way, purchasing a stock or an ETF is not all that different from buying a car. An automaker can use a slogan such as “sign then drive,” which seems rather easy. However, despite the ease of the acquisition, the vehicle is not immune from ever experiencing engine trouble or driving over a pothole that causes a flat tire. Thankfully, the general public is well-versed on the potential challenges of buying and driving a car. The ETF industry needs to reach that same level of understanding for its investors.
