Advisors Favor Exchange-Traded Funds

CNBC reports that according to a recent survey, advisors are preferencing exchange-traded funds over any other investment choice, in part because of their transparency, liquidity, and low costs. ETFs can also be traded throughout the day and are primarily passive. Their expense ratio is lower than actively managed mutual funds and they offer certain tax benefits. For example, unlike with mutual funds, capital gains are not as likely to arise with exchange-traded funds.

In the 2015 Trends in Investing Survey, conducted by the Journal of Financial Planning and the FPA Research and Practice Institute, 81% of advisors said that they recommend or use ETFs—that’s significantly up from 2006 when the survey found that just 40 % of advisors used exchange-traded funds. Meantime, Morningstar, an investment research firm, reports that ETFs hold about $2.1 trillion of investor assets. However, the use of smart-beta ETFs is still low.

Exchange-traded funds may come with plenty of risks. For example there are market risks because ETFs are traded on big stock exchanges. The cost of an ETF can change throughout the day. Transaction costs can be higher than other funds. There also may be a commission and the cost of a “bid-ask spread,” which is the difference between the price of the lowest seller and that of the highest buyer, when purchasing or selling an ETF. Buying an ETF costs the asking price. Payment of the bid price is required when selling.

There are also certain ETFs in which holdings are restricted to certain sectors and countries. Purchasing these ETFs can be high-risk and may involve betting on that part of the market’s outperformance. Meantime, inverse and leveraged ETFs do come with high risks, high costs, and less-tax-efficiency than more traditional ETFs. Leveraged ETFs and commodities ETFs typically have complex derivatives of assets instead of the assets to which they are supposed to be linked. In recent years, numerous leveraged ETFs have lost money while many more have shut down. When the latter occurs, shareholders are the ones left having to pay fees and commissions for a new investment to take the place of a closed fund.

Exchange-traded funds are not for everyone. The risks they bring with them can hurt some investors. If you think that your broker failed to adequately apprise you of the risks or fees involved and you sustained significant losses, please contact our securities lawyers today to explore your legal options.

Exchange-traded funds now tops with advisors: Study, CNBC, June 5, 2015

Exchange-Traded Funds, SEC

Exchange-Traded Fund Strategist F-Squared to Pay $35M to Settle Charges that It Misled Investors, Stockbroker Fraud Blog, December 24, 2014