Why ETFs

ETFs as Building Blocks for Asset Allocation Models

In recent years, active managers have dramatically under-performed their benchmarks. In fact, a recent study from S&P reported that, in 2015, 66.11% of large-cap managers, 56.81% of mid-cap managers, and 72.2% of small-cap managers underperformed the S&P 500, the S&P MidCap 400®, and the S&P SmallCap 600®, respectively.

The figures are equally unfavorable when viewed over longer-term investment horizons. Over the five-year period, 84.15% of large-cap managers, 76.69% of mid-cap managers, and 90.13% of small-cap managers lagged behind their respective benchmarks. Similarly, over the 10-year investment horizon, 82.14% of large-cap managers, 87.61% of mid-cap managers, and 88.42% of small-cap managers failed to outperform on a relative basis.

So the million-dollar question is: Why compensate mutual fund managers—handsomely, in some cases—if they cannot even match their benchmark, never mind beat it? The answer is don’t compensate them!

Exchange-traded funds (ETFs), in their most basic form, replicate an index like the S&P 500 nearly exactly—and at a very low cost. The typical internal cost can be a fraction of what a typical mutual manager using the S&P 500 as a benchmark would charge.

At WT Wealth Management, we believe that ETFs are an important part of every investor’s portfolio. ETFs deliver broad-based exposure to a variety of popular asset classes at a very reasonable cost, and with constant second-by-second pricing throughout the trading day. ETFs are also more much flexible than mutual funds when it comes to managing tax implications and tax burdens on an investor’s portfolio. Mutual funds, by design, pass along all dividends and capital-gain burdens to the investor at the end of each year. It doesn’t matter if you didn’t sell any shares — the mutual funds “square up” gains and dividends by reporting them as income to the investor on a 1099. With an ETF, you deal with the taxes when you sell the position. In many cases, this can dramatically lessen your tax burden annually.

Finally, studies have shown that most of an investor’s returns result from asset-allocation decisions, not individual security selection or perfectly timing the markets. With that in mind, exchange-traded funds (ETFs) offer precise, efficient, ‘style-drift’-free exposure to a wide variety of asset classes that are essential to the construction of a broadly diversified portfolio.

When compared to actively managed mutual funds, the benefits of using ETFs to build asset allocation models include:

ETS Building Blocks

Investment Process

Investment Process

WE BELIEVE asset allocation strategies should be established to meet the individual needs of each investor based on their time horizon, risk tolerance and retirement goals.
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