Exchange Traded Funds (ETFs)
I emphasize the use of exchange traded funds (ETFs) representing unique asset classes as a means to build and manage simple, well-diversified and low-cost investment portfolios. I primarily, but not exclusively, use iShares (a division of BlackRock) branded ETFs because they are the industry leader and provide the most comprehensive research information and data on their funds and the underlying indexes they track.
What is an ETF?
Exchange traded funds (ETFs) are investment vehicles that hold individual securities--stocks, bonds, and commodities--that, typically, passively track specific market indexes (such as the S&P 500 Index, the MSCI EAFE Index, the Bloomberg U.S. Aggregate Bond Index, and even gold bullion).
​
ETFs are liquid
A key difference compared to traditional mutual funds is that ETFs trade on an exchange--intraday, like a stock. The ultimate liquidity of any ETF is, however, dependent upon the liquidity of the underlying assets.
​
ETFs are tax-efficient
I employ passive index ETFs which trade securities within the funds infrequently. And, because they trade on an exchange, investor redemptions are met through the sale to another investor--not through the ETF sponsor via the liquidation of underlying fund securities. The net effect is that these ETFs produce and distribute minimal, if any, capital gains.
​
ETFs are low-cost
For the ETFs that I employ, fees range from 0.03% per year for an ETF that follows the well-known S&P 500 Index to 0.79% per year for one that tracks the more esoteric MSCI Frontier and Emerging Markets Select Index.
A well-balanced, asset-class diversified ETF portfolio will have annual fees of less than 0.25%--about 1/3 the cost of similarly structured portfolio of traditional mutual funds (using Lipper category averages).
​
ETFs are transparent
While they don't change frequently, ETF holdings are published and publicly available on a daily basis.