3 Essential ETF Investment Considerations

Over the past 20 years, we’ve seen the proliferation of exchange-traded funds (ETFs) and their disruptive forces across global financial markets. As of the end of 2022, global ETF assets under management (AUM) reached $9.6 trillion, up from $204 billion in 2003. ETF AUM has grown at about a 15% CAGR here in the U.S. since  2010.

But if you’re new to ETF investing, you might be wondering where to start and what they can offer your portfolio. Let’s explore the basics you should keep in mind as you consider ETFs below.

ETF Landscape

ETFs are pooled investment securities similar to a mutual fund, though they trade on a stock exchange and provide liquidity throughout the day (mutual funds only price at the end of the day). Most are passively managed and designed to track various market indices across equities, fixed income, commodities, etc., while a smaller, emerging segment is actively managed.

Some key benefits of ETFs include diversification, liquidity, cost efficiency, and importantly, tax benefits. ETFs can offer investors easy access to a broad basket of stocks, bonds, or other assets, along with the flexibility of being traded throughout market hours. They generally have low expense ratios and trading costs, while the “in kind” redemption process creates tax efficiencies compared to their mutual fund peers.

ETF Classifications

As you consider investing in ETFs, you’ll also want to familiarize yourself with some of the key types. They are generally classified according to the following categories:

  • Passive ETFs aim to replicate the performance of a specific market index, most notably the S&P 500.
  • Smart Beta ETFs blend passive and active investing, offering a rules-based approach to security selection. Common types include growth/value, momentum, low volatility, quality, dividend, and size.
  • Thematic ETFs are designed to invest in a particular theme or trend, such as energy transition or technology innovation.
  • Active ETFs are managed by portfolio managers who actively make decisions to outperform an index.

Portfolio Applications

So, when are ETFs a good fit—and could they work for you?

For investors who don’t have the time or expertise to manage single stock/bond portfolios, ETFs offer a convenient way to gain exposure to the financial markets. They can offer broad, diversified exposures while allowing investors to take a targeted approach to factors such as specific geographies, sectors, and investment themes.

Make ETF Investing Easy

We have been actively adopting ETFs at Carlson Investments for several years, so you don’t have to navigate them alone. Our team provides ETF model portfolios for our offerings, and we would be happy to discuss these options with you, too! Chat with a Carlson advisor to start diversifying and strengthening your portfolio today.

Carlson Investments does not provide tax, legal, or accounting advice. This content has been written for informational purposes only. Always consult your individual tax, legal, or financial professionals for advice tailored to your situation.

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