Glyn Jones, Senior Business Development Manager, Vanguard, explains how Exchange Traded Funds can be used in client portfolios just like any other index fund.
We've heard from some advisors who mistakenly believe they need special permission to advise on ETFs for their clients. But, don't worry; any advisor who is qualified to give investment advice can also give advice on ETFs under FSA guidance. Exchange- traded funds can be used in client portfolios just like any other index funds. And, just like index funds, ETFs provide broad market diversification by holding all or a representative sample of the securities in an index.
ETFs, like other index funds, also tend to be less expensive than actively-managed funds and costs matter, because every pound that gets paid in charges comes out of your client's investment. High costs can have a large impact on the investment returns of a portfolio. Remember that costs add up and compound negatively over time, just like interest, but down instead of up. The low cost and diversified nature of index ETFs can make them suitable as core holdings in your client portfolios.
The speed and flexibility of ETF trading can also help with other investment functions. These include putting money to work quickly and rebalancing portfolios, which is often how institutional investors use ETFs. For example, when you take on a new client or a client receives and unexpected windfall, you could use ETFs to put their money to work quickly in the market while you work out an investment strategy for them. You can also use ETFs to quickly rebalance a client portfolio following a periodic review.
So while ETFs are just another type of index fund there are some useful differences, too. Now, remember, ETFs aren't a commodity to be bought and sold simply on price. You'll need to undertake the same level of due diligence on an ETF as you would any other type of investment before selecting one for your clients.