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Advisor ETF Insights

5 reasons advisors like ETFs

They may not be sexy, but exchange-traded funds offer lower costs, transparency and diversification for clients across the investing spectrum


Date: April 24, 2017

"ETFs aren't sexy, but they work," says personal finance blogger Kerry Taylor of over a glass of red wine in my living room. She takes another sip, adding, "ETFs are boring, but a good investment to have in your portfolio."

While exchange-traded funds (ETFs) have been around for over 25 years, advisors still get many questions about them and why they are a worthy addition to an investor's portfolio. There's no doubt they are gaining in popularity - Canadian ETF assets crossed the $120-billion mark at the end of February. But fear and misconceptions have kept some investors from diving into the ETF pool.

Here are five reasons why financial advisors like ETFs (and why investors should too):

1. Lower costs

ETFs are popular with advisors because they help their clients save money. Investors get lower fees, transparency and the availability to get a broad exposure to the market, says Krista Matheson, head of ETFs and structured products at Manulife Investments.

But how does that differ from mutual funds? It's a popular question, says Ms. Matheson, even in the ETF industry and among advisors.

"My sense is that when most investors look at the differences between ETFs and mutual funds, they're really referring to the underlying strategies of those funds," says Ms. Matheson. "ETFs are, for the most part, either passive or rules-based, strategic beta-type strategies, which would be much lower-cost than most mutual funds, which tend to be more actively managed."

Most ETFs either passively track an underlying index or (in the case of strategic or "smart" beta) follow a rules-based index approach, focusing on factors such as size, value and profitability in an effort to improve returns.

As investors become more educated on the effect that costs are having on their investment returns, they're increasingly turning to passive or rules-based strategies to lower the overall cost of their portfolios, particularly in areas of the market where active management can be less effective, says Ms. Matheson.

2. Easy way to diversify portfolios

Another advantage of ETFs is diversification. An investor could buy as few as 3 or 4 ETFS to build a diversified portfolio and still keep costs low.

"A lot of advisors and investors use ETFs as a replacement for individual stock holdings, another way to diversify a portfolio at a low cost," says Ms. Matheson. "It's a great way to get broad market exposure at a lower cost."

3. Good choice for passive investors

"Today, people are building entire investment portfolios with ETFs," says Ms. Matheson. "It depends on the investor. Passive ETFs can help lower the overall fees on a portfolio, and in areas of the market where it is difficult to outperform, lower fees are particularly important."

Although she notes that ETFs can be a good choice for passive investors, Ms. Matheson says there are advantages to adding other types of strategies as well. "It really comes down to investor preference. A combination of active and passive exposure can help investors add value to their portfolios or other investment objectives."

Ms. Taylor agrees that an ETF can be a good choice for a passive investor. "You buy the index, you pay very minimal fees and you stay invested long-term," she says.

She notes, however, that an ETF still trades like a stock. Unlike a mutual fund, which has one price set per day, the price of an ETF is going to fluctuate and change throughout the day.

"It can be intimidating [for investors who have never] bought into the stock market before, so it's good to have a financial advisor to help walk [them] through the process," she says.

4. Transparency

One important advantage of having ETFs in a portfolio is increased transparency. Many ETFs track an index and disclose their holdings on a daily basis. That's important to many clients, says Ms. Matheson.

"With passive or other index-base strategies, you know exactly what you're getting," she says. "The strategy of the fund is defined up front. You can see on a daily basis what the portfolio holdings are, in most cases. You can see what the performance is on the TSX because they trade there."

5. Something for everyone

Whatever a client's priorities - income, low volatility, long-term gains, a socially responsible fund - advisors can offer ETFs that will get that exposure through a vehicle that is lower cost. And with more than 450 ETFs in the market, according to the Canadian ETF Association, there really is a fund for everyone.

Sponsored by Manulife

Commentary is for general information purposes only and should not be relied on for specific financial or other advice. Opinions expressed are subject to change based on market and other conditions. Commissions, management fees and expenses all may be associated with exchange traded funds (ETFs). Investment objectives, risks, fees, expenses and other important information are contained in the prospectus, please read it before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

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