ETFs Are Now Mainstream. Here’s Why They’re So Appealing. – Kiplinger’s Personal Finance

Long gone, says Jason Bloom, senior director of global ETF strategy at Invesco, are the days when he had to explain to investors what ETFs are and how they work. “ETFs are mainstream,” he says. 

Wealth managers incorporate these securities, which trade like stocks but hold baskets of investments the way mutual funds do, into client portfolios as often as they include stocks, bonds and mutual funds.

Tracy S. Burke, a partner and investment consultant at the asset management firm Conrad Siegel, in Harrisburg, Pennsylvania, favors ETFs over mutual funds in taxable accounts. Because of the way ETFs are structured, holding these types of securities in a taxable account will likely generate less tax liability than holding similarly structured mutual funds in the same account. “We use ETFs in our practice – and pretty heavily, in fact,” says Burke. 

Insurance and pension fund asset managers use them, too. “It’s easier for an insurance company to buy a basket of bonds in an ETF than it is to build their own basket, security by security,” says Johnson. 

And it’s worth noting that the Federal Reserve relied on ETFs as a way to buttress the bond market during the early 2020 selloff. The central bank invested billions in index-based ETFs in a variety of bond sectors, including government bonds, corporate debt and mortgage-backed securities. 

Traditional mutual fund companies continue to branch into the ETF market. The latest: Capital Group, the investment firm behind the American Funds brand of mutual funds, launched six actively managed ETFs in February, including one fixed-income core strategy, three stock funds focused on the U.S., and two foreign-stock ETFs. 

Though practically ubiquitous, ETFs are still evolving. In their early days, these funds tracked broad, well-known indexes. Then came smart-beta funds, or ETFs that track customized benchmarks with the aim to beat the traditional bogeys. Now, actively managed ETFs are emerging. Active ETFs accounted for nearly half of all new fund launches over the past 18 months, according to Morningstar. What’s more, for the third year in a row, new ETFs outnumbered new mutual fund launches. 

What hasn’t changed are the reasons ETFs are so appealing. These funds are typically low cost, and they trade commission-free at most brokerage firms. They’re also more tax-efficient than mutual funds. They are less likely to generate capital gains distributions like mutual funds do, for a start, though you’ll still owe taxes on any gains you pocket when you sell. 

As with stocks, you can execute a trade to buy and sell shares in an ETF at any time during the trading day. You can even sell them short or trade options tied to ETFs. 

And ETFs are nimble. With one ETF, you …….


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