why we use ETFs

ETFs have been called, by many investment professionals, the most innovative investment vehicle in the past two decades.  They’ve also been called the ‘next generation mutual fund’.  We chose to use ETFs as the foundation of our investment strategies for a number of reasons:

ETFs allow us to access new investment opportunities.  The proliferation of ETFs representing asset classes other than equities and fixed income investments allows us to access investment strategies and techniques that up to now have only been available to hedge funds and large sophisticated investors.

ETFs are liquid.  ETFs trade continuously throughout the day, so we can execute our investment decisions and take advantage of investment opportunities when we want.  With mutual funds, we wouldn’t be able to buy or sell securities until the market close.

ETFs are inexpensive.  The average expense ratio for actively managed US equity mutual funds is approximately 1.45%.  The average US equity ETF expense ratio is approximately 0.29%. 

ETFs are tax efficient.  Most ETFs don’t ever pay out capital gain distributions.  Mutual funds typically have much larger capital gain distributions and you have to pay taxes on those distributions – even if you didn’t sell any shares. 

ETFs are transparent.  Because ETFs are required to report holdings every day, we always know what we hold in our portfolios.  Since mutual funds only disclose holdings quarterly it would be difficult to know what we own at any point in time.