ETFs: Helping Investors Deal With Uncertainty

The markets are filled with uncertainty over Iran, the next development in the EU debt crisis and future tax hikes. ETF investors are well positioned for these uncertainties as the ETF vehicle itself provides investors with the access, efficiency and transparency to address uncertain times.


ETF investors have access to many types of asset classes that traditional investors in mutual funds are shut out from. Physical commodities like gold and silver are great examples of assets that ETF investors can access and mutual fund owners cannot. Gold and silver are not considered “securities,” a requirement to be held by a typical mutual fund. Instead mutual fund investors can own funds focused on gold and silver mining and exploration stocks. While these indirect approaches are not poor investments they can offer big differences in performance. For example, in 2011 when physical gold gained over 9%, gold mining stocks were off as much as 30%. The access through an ETF made all the difference.


The average ETF charges around 55bps while the average mutual fund is close to double that figure. ETFs, when compared with mutual funds in the same asset class, are more cost efficient. In addition, most ETFs are structured in a way that makes them more tax efficient than the average mutual fund. No one likes to pay more taxes and being in a tax efficient product structure helps investors keep more of their gains.


The majority of ETFs reveal their holdings every day. This transparency allows investors to know what they own and why they own it. This level of transparency is unique in the secretive investment world. Mutual funds, for example, are only required to reveal their holdings on a quarterly basis. Quick question/scary thought…how can an investor properly asset allocate or assess their risk levels when they only know what they own four times a year?

ETFs are not a perfect investment vehicle but they do offer some built in features that make investing in uncertain times a little more palatable. Perhaps that’s why 2011 saw ETFs take in more new assets than mutual funds, despite the mutual fund industry being about seven times larger.