For Shomari Hearn, it is an oldie-but-goodie strategy: using exchange-traded funds to help clients bolster international diversity in their equity investment portfolios.
“Basically, we have using international indexed ETFs for certain regions for over 10 years. It is an effective way to get exposure,” said Hearn, a CFP and an advisor and vice president for Palisades Hudson Financial Group, a Fort Lauderdale, Fla.-based firm with $1.2 billion in assets.
“To get that exposure otherwise can be costly,” he said.
Hearn relies on the lower-cost indexed ETFs for investment in well-developed countries such as Canada or Japan.
In those markets, he said, “We don’t feel managers can add a great degree of alpha.”
For investments in emerging-market economies, such as those in the Far East, Russia and Southeast Asia, however, Hearn prefers actively managed ETFs.
In those markets, “follow a manager you are comfortable with,” based on their mutual fund performance, he said.
Rob Brown, senior vice president and chief investment officer for United Capital Financial Life Management in Newport Beach, Calif., agreed that the lower costs of indexed ETFs make them “really, really powerful as an alternative to buying individual international stocks.”
“The advantages are vast, and they are not being adequately appreciated,” he said.
Indeed, ETFs create investment diversification opportunities that would be impossible to achieve with an average asset-sized client’s account otherwise, Brown said.
He cautions, however, that each fund should be evaluated for its expense ratios and its liquidity.
Most ETFs are extremely liquid, Brown said.
ETFs that are in high demand by individual investors and institutions attract plenty of market makers because of the higher volumes of their sales. As a result, the spreads shrink between the ask and the buy prices, and liquidity grows.
But some funds, the market data will make readily apparent, have less popularity and therefore appear difficult to shed.
Just a few ETFs suffer this problem among the vast majority that have been created in the past decade, Brown said.
But scouting carefully over the daily market data will stop advisors from getting snagged.
“Look at how they are trading every day. Some should be avoided,” Brown said.
When investors consider new ETFs with stakes in emerging markets, he thinks that even more caution should be applied.
“You have to look closely at how they are trading every day. If it doesn’t trade really well, it should be avoided,” Brown said.
Miriam Rozen writes about the financial advisory industry and is a staff reporter for Texas Lawyer.
This story is part of a 30-30 series on smart ETF strategies.
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