ETFs Are a Smart Choice for Many
A deeper look into ETFs’ potential for flexibility, tax efficiency and low cost, and why they may make
sense for your portfolio.
For close to a century, mutual funds have been U.S.
investors’ go-to choice in searching for diversification at a
reasonable cost. In recent years, though, exchange-traded
funds (ETFs) have emerged as an attractive option for
achieving similar benefits while adding features, such as the
ability to buy and sell during the trading day. Despite their
increasing popularity, ETFs are a relative unknown among
some investors who could likely stand to gain by including
them in their portfolios.
What’s an ETF?
ETFs are essentially securities that generally track an index,
a commodity or a basket of assets like an index mutual
fund, except they trade like stocks on an exchange. When
you buy an ETF, you own a single security which represents
a basket of other securities that generally fluctuates with
the value of the underlying assets.
With an ETF, you place an order to buy or sell shares just as
with any stock—and you typically pay a commission on that
trade unless you are buying one of many commission-free
ETFs. This means you can buy or sell an ETF anytime during
the trading day. In contrast, you can only buy a mutual fund
at its daily price after the market closes.
ETFs also tend to be more tax-efficient than mutual funds
because of their unique structure. For example, mutual
funds usually make distributions at the end of the calendar
year to account for fund managers’ decisions to sell a stock
during the course of the year. ETFs typically can defer such
distributions by shedding their lowest-basis shares to
institutional traders.
ETFs also make a lot of sense for investors who are
focused on transparency. With most ETFs, the details of
every security in the fund are published daily on the ETF
ETFs Are a Smart Choice for Many
Michael Iachini, CFA, CFP®
Managing Director of Mutual Fund & ETF Research,
Charles Schwab Investment Advisory, Inc.
• ETFs are securities that generally track an
index, a commodity or a basket of assets
like an index mutual fund, except they trade
like stocks on an exchange. This means you
can buy or sell an ETF anytime during the
trading day.
• ETFs make sense for investors who are
focused on transparency. With most ETFs,
the details of every security in the fund
are published daily on the ETF company’s
website.
• In addition to granting low-cost access to a
broad swath of the market, ETFs can help
fill gaps in a diversified portfolio of stocks
or mutual funds. They also are a great
choice for tactical investing, or temporarily
overweighting or underweighting asset
classes based on forward-looking views of
the market.
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company’s website. Most mutual funds, by comparison,
only reveal their underlying securities four times per year,
with a typical lag time of one month.
When do ETFs make the most sense?
While the benefits of ETFs make them attractive to a wide
range of investors, they may make particularly smart sense
for those with the following goals or needs:
• Looking to invest in U.S. stocks for the long term: If
you’re looking to make a big long-term investment in
U.S. stocks, a broad-market ETF can give you low-cost
access to a diversified range of securities. While some
are subject to commissions, ETFs typically have lower
operating costs than mutual funds and those savings
can add up over the long haul.
• Gaining exposure to a specific sector or asset class: ETFs
can help fill in gaps in a diversified portfolio of stocks or
mutual funds at relatively low cost. They also are a great
choice for tactical investing, or temporarily overweighting
or underweighting asset classes based on forwardlooking views of the market. For instance, if you want
to add to your health-care industry exposure, you may
want to consider a health-care sector ETF. ETFs generally
offer a wider array of choices than mutual funds for
focusing on specific sectors or pieces of the market.
• Maintaining a certain degree of liquidity: Investors
are often faced with the dilemma of how much of their
savings they should keep in cash in order to cover
monthly or surprise expenses. Since ETFs are traded
like stocks, they offer greater flexibility and can be a
better choice for entering and exiting positions quickly
and giving investors greater control in managing their
personal finances.
While mutual funds have been popular over the years
and likely still deserve a place in your portfolio, adding
ETFs may help you build even more diversified holdings at
low cost while giving you added flexibility to manage your
investments the way you want.
Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges, and expenses.
You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.
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. Unlike
mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset
value (NAV).
Since a sector fund is typically not diversified and focuses its investments on companies involved in a specific sector, the fund may involve a greater degree of risk than an
investment in other mutual funds with greater diversification.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The
investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making
any investment decision.
©2014 Charles Schwab & Co., Inc. All rights reserved. Member SIPC. IAN (0914-5526) ELC82580-00 (09/14)
ETFs Are a Smart Choice for Many
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