A wild week on Wall Street came to a close with a sharp pullback on Friday, as investors blew off news that the U.S. economy expanded by 3.2% in the first quarter of the year. The probe into potentially illegal activities at Goldman Sachs kept the financial sector in focus throughout the week, while the fallout from an explosion at an offshore oil rig threatened to derail the energy industry. It was also an interesting week in the ETF industry, with several new product launches and a handful of interesting filings from issuers.
Below, we highlight three of the most interesting articles from around the Web that touch on various elements of ETF investing:
Back to Basics: Tax Benefits of ETFs at TheStreet.com
In this article, Don Dion dives into both the simple and complex characteristics of ETFs that offer potential tax advantages. Because ETF portfolios are passively managed – in that they track an established index such as the S&P 500 or DJIA – there is almost no turnover and thus virtually zero trading fees. Another important advantage is the fact that ETFs can be traded on the secondary market, while mutual funds’ shares must be redeemed by the issuing fund company. If a large amount of shareholders place redemption requests that outstrips the fund’s cash reserve, the fund must sell securities and force remaining shareholders to realize taxable capital gains. Finally, the paradigm between Authorized Participants (APs) and issuers ensures that the individual investor has much more control over when they realize capital gains. If there is a glut of demand, APs can buy securities in the market and exchange them for shares in an ETF; a glut in supply would allow the AP to redeem its shares back to the issuer “in kind” for the underlying securities. If you’re unclear on how you the use of ETFs could improve your tax efficiency, this piece is a must read.
Do Your Homework Before Dumping Mutual Funds for ETFs at The Globe And Mail
Although ETFs have a significant fee advantage relative to mutual funds, Dan Hallett argues that it is important to consider all the expenses, both explicit and indirect, that ETF investors may incur. If the individual investor seeks out professional advice, this adds a fee of 1.0% to 1.4% to their total portfolio value – effectively raising fees to mutual fund levels. Although do-it-yourself investors manage to avoid this, their poor portfolio construction and subsequent trading also manages to negate the fee advantage through transaction costs. Instead of seeking out ETFs that give investors direct access to specific slices of the market, they should focus on broad-based indices (offering them the most diversification possible at the lowest possible cost) and employ a buy-and-hold strategy.
Talking Emerging Markets ETFS With Richard Kang at ETF Database
Richard Kang, CIO and Director of Research at Emerging Global Advisors, LLC, spoke to ETF Database about emerging market ETFs and their essential role in modern portfolio construction. He begins by addressing the ‘home bias’ issue, where the makeup of U.S. investors’ portfolio is myopically focused on U.S. equities. Comparing the volatility of markets over the past ten years and the current political landscape in both the U.S. and Europe with that of emerging markets, Richard makes a case for investors to accept the perceived greater volatility and risk premium of emerging markets. He also provides a shrewd analysis of the term ‘emerging market’, and how it is often incorrectly attributed to countries such as South Korea, Taiwan, and Israel, who have developed well beyond the classification.
Disclosure: No positions at time of writing.