Many of the well-known benefits of exchange traded funds (ETFs), including diversification, lower costs, flexibility and tax efficiency, tend to overshadow the complex features and pricing of these products, according to a whitepaper released by Pershing. The report, What Lies Beneath: Understanding the Structure and Costs in ETFs, outlines underlying components that impact ETF pricing, and identifies areas that advisors should keep in mind when evaluating the true cost of ETF ownership for their clients.
The tips include:
Look Beyond Expense Ratios– Advisors should also consider costs that are not included in the expense ratio that complex types of ETFs may accrue (i.e. deferred tax liabilities).
Understand Components of the Bid-Ask Spread– Investors and advisors should examine the underlying components that can significantly influence the value of the bid-ask spread and understand the implications it can have on the cost of ETFs.
Monitor Tracking Errors– Advisors should not overlook the tracking error – which is the risk that an ETF’s price might not match the fund’s benchmark.
Evaluate Spreads on Commission-free ETFs – Advisors should investigate whether the spread on no-transaction fee funds are wider than that of similar ETFs with transaction fees.
«As ETFs continue to grow in popularity, it’s important for advisors to be as well informed as possible about the apparent and underlying factors that influence the cost of their ownership,» said Justin Fay, vice president and solutions manager for alternative investments and ETFs at Pershing. «Taking these factors into account will help advisors make a more accurate ‘apples-to-apples’ comparison, between ETFs, as well as between other investment options – such as low-cost mutual funds.»
To obtain a copy of Pershing’s whitepaper you may use this link