The rapid rise of exchange traded funds is creating a need to really scrutinize and understand what these investments entail.
That’s the recommendation to financial advisors from Eric Biegeleisen, director of research at Charles Schwab’s Windhaven Investment Management.
Advisors “need to look under the hood,” Biegeleisen said during a session at the Morningstar Investment Conference in Chicago on Thursday. “You have to understand why every stock and bond is in there.”
ETFs aimed at the same investment category can perform wildly different, he told a group of conference attendees. Advisors should buy into the story, the logic and the process of a particular ETF before deciding to invest.
Schwab bought ETF specialist Windhaven in 2010 for $150 million. The acquisition reportedly provided an instant boost to new business for the brokerage. Windhaven’s products are sold in Schwab’s more than 300 retail locations, Biegeleisen says, and Windhaven’s asset growth is largely thanks to sales through the branch offices.
Exchange traded funds gathered more than $119 billion in net new money in 2011, according to IndexUniverse. That figure compares to Morningstar's estimate of a $58.58 billion increase for traditional mutual funds last year.
One challenge for advisors and their clients with this investment is figuring out what an ETF replaces in a client’s portfolio. Biegeleisen suggests an ETF could replace part of an investor’s equity holdings or it may appeal to those who own alternative investments, such as those tied to hedge funds or private equity.
Thomas Fox, the co-founder of Quantitative Advantage who sat on the panel with Biegeleisen, says advisors still need to do a better job of explaining ETFs to their clients. And firms that market the funds to advisors need to simplify their story to make the products easier to understand, he says.
“If we can’t explain to (investors) or the advisors can’t explain to them, it’s not very good,” Fox says.
Register or login for access to this item and much more
All Financial Planning content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access