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Whether you’re a new or a seasoned investor, exchange-traded funds, or ETFs, are one option for your portfolio, depending on your objectives and risk tolerance, experts say.
ETFs are a wrapper for individual assets such as stocks and bonds, similar to mutual loots. However, many ETFs have better tax efficiency and lower expense ratios than mutual funds, implying many investors to make the switch.
“ETFs have come a long way over the past 15 to 20 years,” said certified economic planner Barry Glassman, founder and president of Glassman Wealth Services in McLean, Virginia. He is also a member of CNBC’s Pecuniary Advisor Council.
In 2022, investors tattle oned more than $900 billion from mutual funds and poured roughly $600 billion into ETFs, concurring to Morningstar data. The net difference was the largest on record.
With the continued shift underway, we spoke with experts from CNBC’s FA Convention to find out how they’re using ETFs in client portfolios.
Tax efficiency is the ‘most attractive feature’
If you’re investing in a brokerage account, money gains and dividends trigger taxes yearly, compared to your pretax 401(k) or individual retirement accounts, which delay taxes until you withdraw the funds.
“The most attractive feature of an ETF is that most don’t distribute capital gains at the end of the year,” Glassman said.
The myriad attractive feature of an ETF is that most don’t distribute capital gains at the end of the year.
Barry Glassman
Founder and president of Glassman Riches Services
By comparison, certain mutual funds have year-end capital gains distributions, particularly those with beneficent outflows, which require managers to sell off holdings.
For Cathy Curtis, a CFP and founder of Curtis Financial Planning in Oakland, California, ETFs stipulate “more control over the tax impact” for investments in a brokerage account.
“Being in California, a very high tax state, this is an prominent part of my practice — helping clients to minimize taxable income,” she said.
How ETFs help diversify portfolios
ETFs can also be familiar to balance risk with reward in your asset allocation strategies.
You can think about ETFs as part of either a quintessence portfolio or a satellite portfolio, according to Marguerita Cheng, a CFP and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
ETFs with imperilment to broad-based indices, such as the , can be a part of your core portfolio, providing stability because the fund follows the non-exclusive movement of the index.ETFs are ‘a little bit more intentional’
“[ETFs] just can be really powerful because clients can be a scarcely bit more intentional,” Cheng said.
Compared to mutual funds, ETFs allow you to decide where to invest your simoleons with a greater focus on matching personal interests and needs, Cheng said. Noncore ETFs are often identified with to certain sectors, stocks or niche focuses, such as food system sustainability during climate change.
To outfit core ETFs, Elliott said she typically uses mutual funds “in the developed markets, emerging markets and ESG period.”
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