ETFs are increasingly becoming a portion of investor portfolios due to their efficiency, transparency and flexibility. However ETFs are not for everyone nor are they the best investment vehicle in every case, says ETF advisor Christian Magoon.
So in that spirit, here's an annotated list of investors who may want to stay away from ETFs.
1. Most Fans Of Active Management - Despite the recent advances in active ETFs from the likes of Pimco, AdvisorShares and Northern Trust, the active ETF space is still not robust. Most investors will be challenged to find a selection of active ETFs to choose from in a variety of asset classes. The good news, however, is that more active ETFs are coming and their efficient and transparent approach should offer a compelling value proposition.
2. Arm Chair Quarterbacks: Sometimes the lack of daily transparency offered by mutual funds is a blessing in disguise. Most ETFs disclose their portfolios daily, which on balance allows investors better information to make decisions with. However some investors are better served only knowing their portfolio holdings once a quarter, the requirement for mutual funds. This controlled access prevents investors from being as subject to the emotion of the markets. So if you are a daily portfolio watcher with an itchy trigger finger, ETFs may not be for you.
3. Premium Shoppers: There are always consumers and investors that are not fazed by costs. By and large, ETFs are like the Costco of investing. They provide access to some of the most compelling opportunities in the marketplace but at a warehouse price. Mutual funds, however, are similar to the department store model, which seems to attract those less price sensitive. Thus, mutual funds offer a premium experience when it comes to fees. Unfortunately that premium experience is not often mirrored in the performance of mutual funds.
4. Max Taxers: This group of investors is either not concerned about taxes or believes paying the maximum amount of taxes is patriotic. We heard this last sentiment about taxes a lot during the Presidential election cycle. The problem for investors in this "max tax" camp is that ETFs operate in a structure that is tax advantaged. Thus an ETF is a poor investment vehicle for this group. Instead traditional mutual funds make more sense.
As mentioned above, ETFs are not for every investor nor are they the perfect investment. The four groups of investors above would fare best avoiding ETFs going forward given their unique views and needs.