Wealth Management & Financial Planning

Wealth Management & Financial Planning

Tools and Techniques

Rarely do we question what might be wrong when things appear to be working. The inverse is also true: we seldom ask what works when things appear in disarray. This column will be a two-part article addressing investment tools of the trade and then techniques for how to employ those tools in your financial planning. We will address what is working and what is not.

The early 1920s must have been a fascinating time to live. The Great War was over; economies were surging ahead, and the period it came to be known as the Roaring ‘20s. The stock market propelled forward, not just in price, but also in participation. The new onslaught of investors required new tools for Wall Street, and the answer was mutual funds, or unit investment trusts to be more specific.

Mutual funds have dominated the investment portfolios of individual investors for decades. The advent of 401(k) and 403(b) defined contribution plans aided and abetted the industry. What was once a requirement for managing the large investor class dissipated as technology increased. But what didn't disappear were the archaic expenses and tax implications embedded in open-ended mutual funds.

Microsoft launched Excel –the spreadsheet technology – in 1985, and the need for efficiency and simplicity by having our money invested together in one fund was eliminated. The first exchange-traded funds (ETFs) were introduced in Canada and were followed shortly by savvy investors on Wall Street with who created their own ETFs – SPY, DIA, and QQQ.

Remember, buying a single share of a SPDR (SPY) gives you the Standard & Poor's 500-stock index. SPY is a unit trust that owns an equal portion of the stocks within the Standard and Poor's 500 indexes. The three founding U.S. ETFs are fondly known as the Spider, Diamonds, and Cubes. One Diamond (DIA) share equals the Dow Jones industrial average of 30 stocks, and Cubes (QQQ) tracks the Nasdaq 100.

As of 2020, the number of exchange-traded funds worldwide is over 7,600, representing about 7.74 trillion U.S. dollars in assets. As of April 2021, the SPDR S&P 500 ETF Trust (NYSE Arca : SPY) was the largest ETF, with about $353.4 billion in assets. The ETF sphere of influence is no longer limited to mirrored indices. They are passive (identical to an index) and active (where management styles are introduced to encourage growth or provide risk protection).

So how is the tool working? The industry's size, the trajectory growth rate relative to its competitor mutual fund, and the fact that actively traded mutual funds are the dominant owners of ETFs probably answers the question. ETFs are more tax efficient than mutual funds. The fees are far easier to determine than the internal trading cost of mutual funds. You know precisely what you own at all times (in a passive ETF), and you can narrow your investment to the smallest sub-sector of any part of the economy.

ETFs work. At Financial Enhancement Group we do use  ETFs and do not use actively traded mutual funds except for the money market and cash instruments.

Financial Enhancement Group is an SEC Registered Investment Advisor. Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated.

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