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Private Portfolio Management

   


 Exchange Traded Funds are very popular and heavily traded by individual and institutional investors.  We use them to help build well diversified, low cost, liquid portfolios for our clients.  The following are some facts about ETFs:

  • They are unmanaged baskets of stocks.
  • There are hundreds available.
  • They trade on major stock exchanges.
  • They are used by institutional managers and small investors.
  • They can be a substitute for managed mutual funds.
  • They can be a substitute for individual stocks or bonds.
  • Expenses are very low compared to mutual funds or “wrap” accounts.
  • The client knows exactly what is held within the ETF.
  • They are priced and trade throughout the day like a stock.
  • Investors can set stop loss orders to reduce risk.

For more in depth information see the links at the bottom of this page.

1.) The ETF Versus the Individual Security

The advantage of owning an ETF over a stock is simply risk. The risk level of owning a basket of stocks in an industry or segment is lower than owning one or two stocks in that category. An investor will not get the explosive return from an ETF that they would from a great stock pick. They will also not get the meltdown caused by all of the unknowns that cause stocks to disintegrate. It could be said that although Enron and Worldcom may be gone, the energy and technology sectors still thrive.

2.) Comparing an ETF to a Managed Mutual Fund

There is a theory that most portfolio managers do not beat their benchmark index simply because the expenses involved in the active management of the fund have to first be overcome.

Although there is a great deal of truth to this, there are a few things to consider.  Even though most funds do not outperform their benchmark index, there are some that do. Our job as advisors is to find the ones that do. Also, managed mutual funds tend to hold cash. This forces them to under-perform in a very strong upward market and outperform when the markets are declining.  This tends to make a managed fund a more conservative investment than just the index. The important thing is that as expenses are added to a fund, those expenses have to be justified. At the same time, the easy access to the ETFs now put a lot of pressure on mutual funds to perform.

3.) Comparing the ETF to a Closed End Fund

Closed end funds have been around for a century or more. There is one key difference between the  ETF and the Closed End Fund or CEF. The CEF tends to have a very large “spread” between its trading price and its net asset value(NAV).  The ETF uses an institutional arbitrage mechanism to keep the spread between its trading price and its NAV very narrow.

Conclusion:

There are advantages to  both managed and unmanaged funds and we use both as building blocks in our portfolio management process.

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