Not all ETFs are created equal


ETFs have definitely made a big splash with investors in recent years.

There are currently more than 1,600 exchange traded products listed in the U.S. alone, with nearly $1.9 trillion of assets. So far this year, assets have risen by 9%, or $157 billion, with net inflows of $76 billion, according to

ETFs can appeal to buy-and-hold investors who want to track the market with indices and low costs. Traders also use ETFs to jump in and out of entire sectors with one trade.

So, many different types of investors use ETFs, which come in all shapes and sizes. Yet it’s important to remember that not all ETFs are created equal. Investors can think of ETFs as simply a wrapper, or a delivery mechanism, for an investment strategy.

The first round of ETFs tracked familiar benchmarks such as the S&P 500. The investment approach of these ETFs is fairly straightforward — they buy every security in the benchmark and occasionally rebalance along with the index.

Since then, some ETFs have grown more complex. For example, there are so-called smart-beta ETFs that essentially mimic strategies used by active managers, but in a rules-based index.

There are also leveraged ETFs that magnify the market’s daily returns, and inverse ETFs that move in the opposite direction of the market, allowing investors to profit when markets fall or hedge. Some of these ETFs have higher fees and are not appropriate as long-term investments. Adding even more complexity, there are exchange traded notes (ETNs) which are structured as credit instruments, while ETFs more resemble mutual funds.

Again, the point is that not all ETFs are the same. There is nothing magical about the ETF structure that makes it a good (or bad) investment. An ETF is only as good as its investment approach. Of course, investors should also consider an ETF’s fees, liquidity, index tracking error, tax efficiency and other factors.

At Covestor, we have a rather agnostic view on ETFs.

For example, some of the active portfolio managers on our investment marketplace use sector ETFs to establish positions in entire industries. They may also use leveraged and inverse ETFs for short-term trades.

There are several portfolios on Covestor that use ETFs for sector rotation strategies or for asset allocation strategies.

For the Covestor Core Portfolios that have no management fees, our Investment Management team favors very low-cost, diversified ETFs for the building blocks.

So clearly, we think ETFs have a place in portfolios, and we see Covestor as part of the same trend of lowering costs and boosting transparency for investors. As always, it’s up to investors to do the research and know exactly what they’re buying when they decide to purchase an ETF or any investment.

Try Covestor’s services with a free trial account. Or you can contact our Client Advisers at 1.866.825.3005.

DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Past performance is no guarantee of future results.