In this last of a three part series, Kevin Ellman, CFP® explains why we should know about Exchange Traded Funds or ETFs.
As index funds they can be used as part of a passive investment strategy. According to research I reviewed from the CNN money website, I feel this research supports the concept that overall investment strategy or asset allocation can contribute much more to your long term investment results than individual stock selection. For example, it may be more important to be in the energy sector when energy is growing rapidly than trying to pick the best energy stock. In addition, another large body of research demonstrates that most active money managers are unable to meet their relevant benchmarks, let alone out-perform them. (source: CNNmoney.com)
Based on this research and our years of experience we have decided to build our portfolio strategies using ETF’s for stock, bond, commodity, currency and real estate exposure. In certain situations we also use individual bonds. Instead of spending our time and resources on fundamental stock research we focus on attempting to identify long term investing trends or themes. We then adjust the asset allocation to reflect our viewpoint and tactically rebalance the allocation several times during the year. (source: Ibbotson)
There are some drawbacks to investing in ETF’s as they are passive strategies. So you wouldn’t receive professional management of your money. These are risks associated with sector investing. You could make a pay on a sector and be wrong or you might pick a sector that performs well but neglect to sell it when it becomes less favorable.
Using this approach we have been able to help our clients meet their financial goals and objectives while managing risk, keeping fund and transaction expenses low and minimizing taxes. Please keep in mind that ETF’s may not be suitable for all clients.
Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges and expenses. Please read the prospectus carefully before investing. ETFs do not sell individual shares directly to investors and only issue their shares in large blocks Exchange-traded funds are subject to risks similar to those of stocks. Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost.
Asset allocation does not protect against loss of principal due to market fluctuations. It is a method used to help manage investment risk. Past Performance does not guarantee future results. This material is for informational purposes only and is not meant as Tax or Legal advice. Please consult with your tax or legal advisor regarding your personal situation.
The opinions expressed are subject to change with economic and market conditions. They are not meant as investment advice. Forward looking statements and market forecasts cannot be guaranteed and may not come to pass. Securities and Investment Advisory Services offered through NFP Securities, Inc. (NFPSI), member FINRA/SIPC. Wealth Preservation Solutions, LLC is a member of PartnersFinancial, an affiliate of NFPSI. Wealth Preservation Solutions, LLC and NFPSI are not affiliated.