Millions of investors have successfully integrated ETFs into their portfolios over the last two decades as these innovative vehicles have surpassed more than $1.6 trillion in global assets. They are used by both retail and institutional accounts as a method of gaining instant exposure to a specific asset class with the click of a button.
Through my conversations with clients, readers, and industry peers, I have recognized several common traits that prosperous ETF investors share.
1. Liquid – Investors that enjoy instant liquidity are certainly drawn to ETFs in the same way as an individual stock. Because you can buy or sell an ETF at any time during the trading day, you have maximum flexibility to make changes whenever you desire. This is especially true for active traders or portfolio managers who are concerned about volatile markets. You never have to worry about surrender or redemption fees that would hinder your investment decision to exit a position once it’s established.
2. Global – ETF investors are also drawn to the variety of global opportunities that exist. These investment vehicles offer single country, regional, or broad-based exposure to a variety of asset classes that span the globe. This allows you to pinpoint an opportunity almost anywhere in the world or take advantage of specific emerging macro themes. The WisdomTree Japan Hedged ETF (DXJ) won numerous awards last year for its unique index approach to combining equity and currency related holdings. This is just one example of a global strategy that many investors were previously unable to access.
3. Risk averse – One of the advantages that ETFs offer over mutual funds is the ability to place automatic stop losses to manage downside risk. Many investors prefer this method of risk management because they don’t have to worry about being stuck in a position that is heading south quickly. In addition, you have the flexibility to set limit orders to execute a trade at a price that is desirable, both on the buy and sell side. Furthermore, the inherent diversification qualities of an ETF mitigate the business risk of investing in a single company.
4. Creative – ETFs allow you to construct a portfolio of creative holdings across a variety of asset classes. Many investors that I come into contact with have broadened their horizons to include commodities, real estate, currencies, and a host of other unique ideas. ETFs allow you to be extremely diversified and offer access to previously hard to reach areas like frontier markets, niche industries, volatility indexes, leverage, and hedging strategies. Websites like ETF.com allow you to hone in on specific options that match your needs and provide excellent detailed information on each fund.
5. Fee-conscious – Experts have drilled into you for years that fees matter and ETF investors are very tuned in to this concept. They abhor large trading commissions, surrender fees, and outsized annual management fees. They are also focused on the disparities in expense ratios and trading commissions between individual ETFs and brokerages. One noted example of this dichotomy is the Vanguard REIT ETF (VNQ) which charges an expense ratio of just 0.10% and the iShares Real Estate ETF (IYR) charges an ongoing fee of 0.45%. That may not seem like a big difference, but paying excess fees can hinder performance over time.
6. Knowledgeable – Another tremendous advantage of owning an ETF is that you know exactly what you own every single day. The ETF sponsors have done an excellent job in disclosing positions via their websites and other outlets so that you are informed about what the underlying portfolio looks like. Hedge funds, mutual funds, and other private label investments often times make it difficult to discern exactly what their current holdings are. Even when you do get this information, it is often many months behind the present day asset allocation.
Each of these traits plays an important role in the investment process for both professional and novice participants. Knowing both what you own and why you own it is a crucial component to a successful outcome with your investing endeavors. I believe that ETFs continue to be on the forefront of innovation in terms of their ability to simplify your life and enhance your returns. That is why they are my preferred vehicle of choice when I am building portfolios for myself and clients.