|
Vancouver,
B.C. (January 15, 2001): We are often
asked, "What is the best way to manage my money?"
At KCM, our response is that managing money is
a marathon.
Therefore, when
it comes to money management, fee-only investment
counsel and financial advisor Adrian Mastracci
says that, "The proven and consistent approach
to create, grow and retain your wealth is with
the diversified long-term investment perspective".
Mastracci, president
of Vancouver based KCM Wealth Management,
comments, "Asset allocation decisions have a far
greater impact on your portfolio than any other
factor. It is like building your home; the blueprint
comes first."
He goes on to
say, "Every component of a portfolio has both
advantages and disadvantages. The newly created
Exchange Traded Funds, or ETFs for short, are
no different".
Mastracci's view
is, "While many ETFs are popular, long-term investors
know that just because an investment vehicle is
popular is not sufficient reason to buy it". Moreover,
he adds, "A full understanding of ETFs is paramount
before including them in any portfolio".
The major characteristics
of ETFs are summarized as follows:
- They are relatively new
vehicles, many having been introduced in the
past 12 months.
- They are passive investment
vehicles, generally structured to mimic various
investment styles, different economic sectors,
geographical considerations or a specific market
index.
- They can be bought and
sold like normal stocks. However, investors
will incur purchase and sale commissions just
like when buying and selling stocks.
- They are known for low
expense ratios.
- They are traded on a number
of recognized exchanges.
- Some ETFs have much more
liquidity than others.
- There usually is no minimum
amount of investment.
- They are generally more
tax efficient than mutual funds.
- They can be used as collateral
at lending institutions.
The decision to include ETFs
in a portfolio depends on the unique goals and
aspirations of each investor. Some
things to consider are:
- An ETF's performance is
generally very similar to the underlying structure
that it intends to mimic. Hence, ETFs would
not be suitable for someone hoping to outperform
a benchmark of choice.
- Investors contemplating
dollar cost averaging, or making regular deposits
to an investment account, may have to be very
mindful of the minimum commissions, especially
on small transactions. This may negate the ETFs
cost advantage over most mutual fund MERs.
- Buying and selling of ETFs
may be better suited through a low-cost commission
account.
- ETFs are generally more
suitable for an equity component of a portfolio.
Although, more "bond type" of ETFs are being
issued.
- An investor who believes
in active portfolio management would likely
stay away from the passively managed ETFs.
- Like other equity components,
ETFs are long-term vehicles and should be considered
as such. Therefore, they are not likely to be
traded actively.
Mastracci summarizes,
"ETFs can be appropriate vehicles for specific
investors. However, they are not the only vehicle
of choice". In addition,
he says, "ETFs are best viewed in context of a
well diversified long-term asset allocation policy".
|
