Wealth Management & Financial Planning

Wealth Management & Financial Planning


The Birth of the Exchange-Traded Funds

Every crisis that America has endured, we have come out better than before. The 1987 crash is being discussed widely during these times.  Recently, we have had the two worse days in the market since the 23% drop 32 years ago. My career in finance started just two weeks before that historic drop. Volatility has simply been a part of my journey.

In every crisis from the tech wreck to the Great Recession of 2008, there are definite improvements made to our financial system.  The crash in 1987 led a few bankers in Canada to create a solution.  They formed the first exchange-traded fund (ETF) on March 9th, 1990.

There must be a catalyst for change.  Rarely does anyone ask what is wrong when things look like they are working. In periods like we have today, everyone is asking what can be and should be done differently.  That’s what happened in Canada in 1990 with the birth of the exchange-traded fund.

An open-end mutual fund is still the largest investment option, but the ETF market has crossed the $6 trillion mark, according to Bloomberg. Keep in mind, the largest holders of exchange-traded funds are the mutual fund companies themselves.  Why would that be?

A mutual fund is required to tell you the top 10 holdings in the fund each quarter. The funds often have more than 100 holdings, so the transparency is limited.  The majority of ETFs are passive in nature meaning nothing goes on inside of the investment vehicle.  You know what you owned from the first day to the day you sold the investment.

The ETF not only provides transparency but also efficiency.  The number one traded ticker symbol on the New York Stock Exchange is SPY, commonly known as the Spiders.  That is the S&P 500 index traded in one ticker symbol.  It is hugely efficient for investors and mutual funds alike.

The big question is if ETFs are more transparent, cheaper in expenses, and even have tax advantages, why has the investing public stayed with mutual funds?  The only answer can be a lack of awareness, lack of understanding, or significant barriers to change. This current crisis may have eliminated several of those barriers.

Perhaps you have money in mutual funds with large capital gains and who don’t want to pay the taxes to make the change to ETFs.  The recent market drop has helped reduce that burden, and this is a good time to visit making the change from old investment vehicles into ETFs. There are major tax advantages as ETFs have no phantom capital gains issues where mutual funds do.

The recent removal or reduction in trading costs also makes this an ideal time to review the investment tools you are using. Use the current crisis to set yourself up for a better future. ETFs have been around since 1990 and since 1993 in the United States.  They are more tax-efficient, generally lower fees, and transparent in your holdings.  If you have questions about ETFs, contact the Financial Enhancement Group at yourlifeafterwork.com

Sources: https://www.bloomberg.com/news/articles/2019-09-16/global-currency-trading-surges-to-6-6-trillion-a-day-market

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.

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