ITA Wealth Management

The following article, “What’s So Great About ETFs?,” was recommended by an astute investor on another forum.  Of the six listed advantages inherent in ETFs, I’ve discussed five at one point or the other on this blog.  I’ve not written about shorting ETFs as it is somewhat specialized.  Not all investors are comfortable shorting stocks.

To the excellent points made in the article, I would add one more.  ETFs make it very easy for the investor to build a portfolio around asset classes or market sectors.  My preference is to use asset classes as they are superior when it comes to covering small-cap stocks.  Vanguard and Barclay’s iShares both have ETFs that implement asset classes and sectors so the investor has the opportunity to put together a portfolio using a wide variety of index ETFs.  It is possible to do the same thing through the use of mutual funds, but one generally needs to migrate to actively managed funds to cover all asset classes.  When using actively managed funds, there is always the possibility the manager will eventually succumb to style drift, thus throwing off the benefits of asset allocation.

Is there ever a time not to use ETFs?  Yes. I would not use ETFs if I were investing a small amount of money each month.  The reason is strictly commissions.  Unless one can keep commissions well below 1% of the investment, don’t use ETFs.  Instead, I would use low-cost index funds as the means for building up a savings or retirement account. Take the following example.  Suppose you are saving $100 a month and you use a discount broker where the commission is $7.00 per trade.  With the small monthly investment of $100, 7% is going into commissions.  Now suppose you saved until you had $1,500 to invest.  Now the $7 commission will cost approximately 0.5% of the investment.  Keep costs down as those savings work to the bottom line.

Lowell Herr

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