Happy Birthday to ETF!
January 29, 2018
By Krista Eberly, CFP®
Exchange traded funds, or ETFs for short, hit a milestone last week. The first ETF to launch, the SPDR S&P 500 ETF, turned twenty-five years old. This product was designed to mimic the performance of the S&P 500, the most common major U.S. stock index. Over the years, ETFs have significantly grown in popularity, availability, and in abundance. Today, you can buy an ETF for just about any investment strategy you can think of. Despite the growth over the past twenty-five years, the first ETF to launch still remains the largest.
What are exchange traded funds? ETFs are similar to mutual funds in that they are comprised of a basket of stocks and/or bonds. They differ in how they trade. A mutual fund trades once a day at the end of each trading day through the mutual fund company. An ETF trades throughout the day like a stock; on an organized market or exchange.
Money flowing into ETFs hit a new record last year. According to Morningstar™, ETFs raked in $466 billion in 2017, a 61% increase from 2016 inflows. Investors have flocked to ETFs over the years due to their low cost structure, passive investment style, and tax efficiency. Most ETFs track a particular index instead of trying to outperform the broad market. Because of this, they tend to carry lower fees than an actively managed fund.
ETFs are popular among active traders in that they provide specific industry or sector exposure in one product. If you think today’s hot trade will be in energy stocks, you can buy the Vanguard Energy ETF and get energy exposure with one click. And, since they trade throughout the day, you can enter or exit a position at any time.
Security National Bank uses ETFs in specific situations; usually where quick but temporary exposure is needed due to individual account circumstances. More broadly, most of our pooled representation remains in traditional mutual funds. Costs are comparable, trading costs (commissions) do not apply, and the long term nature of our management is more compatible to mutual fund exposure than the ETF world.
This view is consistent with industry data. ETFs are growing rapidly, but traditional mutual funds retain a wide lead in assets under management.
If you would like
discuss what and why various investment vehicles are used in your portfolio or to learn more about ETFs ,
contact your Security National Bank Wealth Management
financial advisor today.