Advisor Jerry Slusiewicz likes to tell clients that ETFs are the new mutual funds: With a nod to the 1970s TV show The Six Million Dollar Man, he adds that they are “built better, stronger, faster.”
ETF trades are easier because clients don’t get hit with unforeseen mutual fund redemption costs, adds Slusiewicz, principal of Pacific Financial Planners in Laguna Niguel, Calif.
Advisors and clients can track the moment-by-moment value of an ETF, as opposed to a mutual fund, whose price is announced just once a day.
“You can set a specific price to buy and a specific price to sell ETFs, whether you’re targeting or using a safety net as an exit strategy,” Slusiewicz says. “I’m a big stop-loss guy.”
Slusiewicz says that's one of the reasons he prefers ETFs over mutual funds. If an advisor is concerned the market is in bad shape mid-day, for example, ETFs add flexibility. "With the mutual fund, you could only get out at the end of the day's carnage, but with an ETF, you can get out at any time," he says.
However, ETFs may encourage some clients to move their investments more than they would otherwise, some advisors say.
“It can shorten clients’ time horizons,” Slusiewicz adds.
That can lead to some bad behavior, according to Tim Maurer, a CFP and the director of personal finance at Buckingham Asset Management and the BAM Alliance in Charleston, S.C. “I like the control of ETFs, but since I don’t believe in day trading I don’t believe there’s an inherent benefit in the ability to trade intra-day for most investors,” he says.
At the same time, Maurer doesn’t think that most advisors are using ETFs that way.
“I would be shocked to find that there are many -- if any -- financial advisors who are actually encouraging their clients to be hyperactive with their portfolios, intra-day or even intra-month or quarter,” he says. “Most of us know that there’s not much benefit to doing that.”
Or, as Slusiewicz puts it: “Just because you can sell, it doesn’t mean you have to sell.”For some clients, though, actively managed mutual funds may make more sense than ETFs, he says.
Still, the benefits of ETFs help all types of clients, those who are inclined to trade more as well as those who are likely to move their money less often, says Marie Dzanis, senior vice president and head of intermediary sales at Northern Trust in Chicago.
“If people are trading regularly as part of their tactical strategy, they might see ETFs as a very comfortable vehicle to trade,” she says. “If it’s a long-term buy-and-hold strategy, then ETFs are actually advantageous, too, because you know at all times what’s in your portfolio and how it’s acting, and that should give greater comfort.”
Paul Hechinger is a contributing writer for Financial Planning and On Wall Street.
This story is part of a 30-30 series on smart ETF strategies.