Exchange-traded funds ‘have come a long way,’ advisor says. How to use them in your portfolio – CNBC

  • Whether you’re a beginner or a seasoned investor, exchange-traded funds are an option for your portfolio.
  • Experts say it can be used for tax efficiency, asset allocation and other investment goals.
  • “ETFs have come a long way in the last 15 to 20 years,” said Barry Glassman, founder and president of Glassman Wealth Services.

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Experts say exchange-traded funds (ETFs) can be an option for your portfolio, depending on your goals and risk tolerance, whether you’re a beginner or a seasoned investor.

ETFs, like mutual funds, are wrappers around individual assets such as stocks and bonds. However, many investors are switching to mutual funds because many ETFs have higher tax efficiency and lower expense ratios than mutual funds.

“ETFs have come a long way in the last 15 to 20 years,” says Barry Glassman, a certified financial planner and founder and president of Glassman Wealth Services in McLean, Virginia. He is also a member of his CNBC Financial Advisory Council.

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Investors sold more than $900 billion from mutual funds in 2022 and poured about $600 billion into ETFs, according to Morningstar data. The net difference was the largest ever.

With continued change underway, we spoke to CNBC’s FA Council experts to find out how their clients are using ETFs in their portfolios.

If you invest in a brokerage account, capital gains and dividends incur taxes each year. By comparison, pre-tax 401(k)s and individual retirement accounts hold taxes deferred until the funds are withdrawn.

“The most attractive feature of ETFs is that most do not distribute capital gains at the end of the year,” Glassman said.

The most attractive feature of ETFs is that most do not distribute capital gains at the end of the year.

barry glassman

Founder and President of Glassman Wealth Services

By comparison, certain mutual funds distribute capital gains at the end of the year and require managers to sell their holdings, especially those with large outflows.

For Kathy Curtis, a CFP and founder of Curtis Financial Planning in Oakland, Calif., ETFs “give you more control over the tax implications” of investing in a brokerage account.

“California is a very high tax state, so this is an important part of my practice, helping my clients minimize their taxable income,” she said.

ETFs can also be used to balance risk and reward in asset allocation strategies.

Margherita Chen, CFP and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, says ETFs can be considered part of a core or satellite portfolio.

ETFs with exposure to a broad index, such as the S&P 500, become part of the core portfolio and provide stability as the fund follows the overall movement of the index. Camila Elliott, an Atlanta-based CFP and co-founder and CEO of Collective Wealth Partners, says her firm primarily uses ETFs for core portfolio positions. Stated.

By comparison, satellite portfolio ETFs offer diversification opportunities and reduce exposure to a single asset or risk. For example, Chen noted that clients interested in opportunities in the video game industry were able to identify video game ETFs that matched their interests.

ETFs in this role aren’t as risky a bet as individual stocks, since there’s no guarantee of the next big industry winner, including the video game industry, but big losses and gains are still possible.

”[ETFs] “It can be very powerful because clients can be a little more intentional,” Chen said.

Compared to mutual funds, ETFs allow individuals to decide where to invest their money by focusing on meeting their interests and needs, Chen said. Non-core ETFs often specialize in a particular sector, stock, or niche focus, such as food system sustainability during climate change.

Elliott said he typically uses mutual funds in “developed markets, emerging markets and ESG areas” to complement his core ETFs.

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