“ETFs can be a powerful addition to your portfolio.”
You’ve probably heard of exchange-traded funds (ETFs). Maybe you’re even invested in them. But chances are you still have questions. Russ Koesterich, BlackRock’s Global Chief Investment Strategist, offers a primer on this increasingly popular investment option.
An ETF is a pooled investment vehicle, much like a mutual fund, that invests in a diversified basket of securities. ETFs typically track the performance of a particular market index, and for that reason, are sometimes referred to as passively managed funds. While structured like a mutual fund, ETFs trade more like stocks. So, purchases and sales are executed at market price throughout the day on the major exchanges. (Mutual funds are bought and sold at their closing price at the end of each trading day.)
What are the key advantages?
One big draw for many investors is ETFs’ relatively low overall costs (expenses are below those of actively managed products). ETFs tend to be very tax efficient (with fewer capital gains distributions), highly liquid (easy to exit and enter at any time) and offer a great deal of transparency (providing daily disclosure of holdings). They can also help investors tap previously hard-to-access asset classes, such as gold and frontier markets.
How can I use ETFs with other funds?
With low costs, access to hundreds of companies and trading flexibility, ETFs can be a powerful addition to your portfolio. ETFs can be particularly useful where the goal is to efficiently access a specific market segment. Say you wish to capture exposure to U.S. equities broadly. You might choose an ETF that tracks the S&P 500. Those positions can be supplemented with mutual funds where you have high conviction in the strategy or the manager’s ability to outperform the broader market, or where you’re targeting a specific investment outcome. So by combining active and indexing, you can gain the exposures you desire, seek a specific outcome and look to mitigate
risks in your portfolio.
How can I access them?
You can purchase ETFs through your existing account, just as you would stocks. We encourage you to explore the options with your financial professional, who can help you furnish your portfolio with ETFs that complement your existing holdings.