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Tactics for Being Tax Savvy With ETFs

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Tax efficiency is seen by 85% of financial advisors as a major reason for offering investor clients exchange-traded funds in their portfolios, according to a recent nationwide survey conducted by and sponsored by OppenheimerFunds.

Mark Butterworth, president of Butterworth Financial in Tulsa, Oklahoma, explains his thinking behind the use of ETFs: “We’ll have the equivalent of large-cap, mid-sized and small companies in the mixture, and if it’s a taxable account or a non-retirement [account], we use ETFs because of tax efficiencies as well as the transparency of what is owned.”

The advisor says that, depending on market conditions, he has gravitated to value-added and alpha-based ETFs but doesn’t employ leveraged products.

Butterworth also points out that his firm aims to be proactive.

“We don’t set it and forget it. Part of the rationale of using ETFs is from a tax-efficiency standpoint. ETFs can have a capital gain, but most of the time it is handled internally. Mutual funds can have those [kinds of] hiccups at year-end,” the advisor explains.

John Cooper, a private-client advisor with Greenwood Capital in Greenwood, South Carolina, mainly uses international and corporate-bond ETFs.

“The reason is some clients need diversification in small accounts under $500,000. Also, our firm does all in-house research, except for international and emerging markets,” he says, adding that the proliferation of ETFs has helped him customize smaller portfolios.

Although a growing number of managers are using non-cap-weighted funds, Nathan Raabe, a partner of CBF Wealth Management in Norfolk, Nebraska, says his practice mainly uses index-weighted ETFs for equities and fixed income exposure “because we take our tilts using Dimensional Fund Advisors’ equity funds.”

The advisor plans to keep using more ETFs in certain asset classes due to cost, “unless mutual funds can do it cheaper and more efficiently.”

For larger portfolios, Myers and his team turn to ETFs as a “strategic addition, either providing fixed income exposure or additional exposure to small- or mid-cap stocks, for example.”

The advisor says his approach does “tilt” toward value-oriented ETFs, and, if possible, equal-weighted ETFs. He also will use generic fixed income index ETFs.

Ron Hauf, an advisor with the Securities Service Network Advisory in Whitefish, Montana, who only has a small portion of his clients’ portfolios in ETFs, has a somewhat different view of the product.

“If there’s an asset that doesn’t need active management, I might employ an ETF,” he says. “But quite frankly, with the compression [of fees] in this industry, active management is as competitive as passive ETFs. Nine times out of 10, I’ll take active management with low expense ratios over passive management.”


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