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Benefits of Index Exchange Traded Funds (ETFs)


When it comes to investing, there are several factors that will determine your overall success.  Index Exchange Traded Funds (ETFs) offer many benefits that may help you attain that success.  Index ETFs are a personal favorite of mine.

What is an Index Fund?  An index fund is a type of fund that is designed to match or track the components and performance of a specific market index.  Two of the most common market indexes are the Dow Jones Industrial Average and the S&P 500.  The list of market indexes is quite long.  If you can think of a specific market you would like to invest in, there is probably an index fund designed to track it.

What is an Exchange Traded Fund (ETF)?  An ETF is a type of investment fund that is traded on a stock exchange.  ETFs are very similar to a mutual fund, but they trade like an individual stock.  The most common ETFs track an index (these are my personal favorites).

Index Funds vs Passive Funds:  Just an FYI.  Index funds are a form of passive funds as most passive funds track an index.  Index funds and passive funds are generally synonymous, and the terms are often used interchangeably.  This is just something to know if you are hearing or reading about either one.

Lower Your "Hidden" Internal Costs:  Many investments, including mutual funds and ETFs, have costs that are sometimes "hidden".  With index funds, the costs are typically much lower than the costs associated with similar funds that are actively managed.  Lowering your "hidden" internal costs is one of the most important factors in determining your overall investing success.  Index ETFs can help with this.

Increase Your Tax Efficiency:  Index ETFs are extremely tax efficient.  Index ETFs use a buy-and-hold strategy, so this typically results in less capital gains taxes for the year, especially short-term capital gains.  With an active manager, they are usually buying and selling stocks more frequently, which often results in you paying more capital gains taxes for the year.  You'd rather pay less taxes, right?!?

Trading Flexibility:  With ETFs, you can trade them throughout the day, just like you would an individual stock.  With mutual funds, you can't trade them throughout the day.  If you buy or sell a mutual fund, you receive whatever price that mutual fund is trading for at the end of the day.  This trading flexibility allows ETF investors to be a little more pro-active if/when they choose to be.

Diversification Benefit:  Diversification is important because it helps spread out your risks.  Most ETFs are extremely diversified.  Many consist of hundreds or even thousands of individual stocks/bonds within the ETF.  If an ETF is tracking an index, then the diversification is similar to that of the index it is tracking.

Be careful:  Like with most investments, not all ETFs are alike.  The most common ETFs track an index (these are my personal favorites), but some are actively managed and have a higher cost.  Others ETFs might have additional risk such as leverage, etc.  Just know what you are buying.  If you're not sure, consult your financial advisor.

Will you be sacrificing performance with Index ETFs?  Not likely.  In fact, there is a better chance your long-term performance will improve with low-cost index funds versus funds that are actively managed.  Want proof?  S&P produces an ongoing report that compares Indexes to Active management, it’s called the ‘S&P Indices Versus Active’ report…SPIVA for short.  You should check it out.  Over the one-year period ending Dec 2016, 66% of active large cap managers, 89.37% of active mid-cap managers, and 85.54% of active small cap managers UNDERPERFORMED their respective benchmark index.  Over the five-year period ending Dec 2016, 88.3% of active large cap managers, 89.95% of active midcap managers, and 96.57% of active smallcap managers UNDERPERFORMED their respective benchmark index.  Over the 15-year period ending Dec 2016, 92.15% of active large cap managers, 95.4% of active midcap managers, and 93.21% of active small cap managers UNDERPERFORMED their respective benchmark index.  Bottom line, indexes have consistently OUTPERFORMED the overwhelming majority of active managers who are trying to beat the index.  So in my opinion, there’s a good chance your future investment performance will be better if you invest in low cost index funds.
(Click here to read the most recent SPIVA Summary report)
(Click here to see all the SPIVA research)

What does Warren Buffett think?  Warren Buffett is considered by many to be the greatest investor of all time.  In his 2017 annual letter to shareholders, he stated, "Both large and small investors should stick with low-cost index funds."

Personal confession:  I use to be more of an “active” financial advisor.  I did a LOT of research on my investment selections too.  I thought I could pick the better active mutual funds or the stocks that would outperform the indexes.  Frankly, I thought I could “beat the market”.  And occasionally, I did “beat the market”.  But more often than not (just like the SPIVA research shows), the indexes did better than my “active” (and heavily researched) investment selections.  So I changed how I managed my clients’ money.  Now, the overwhelming majority of my clients’ money is invested in low cost index funds.

Business Owners / Employers:  I’m a big fan of using low cost index funds in retirement plans (401k, etc).  Not only do index funds lower the cost of the plan for you and your employees, it also removes the ongoing burden of what you should do with underperforming actively managed funds.  Low cost index funds can also reduce your fiduciary risk.  If you think your plan would benefit from low cost index funds, let me know.

HyLine Bottom Line:  Index ETFs offer many benefits such as low cost, tax efficiency, trading flexibility, diversification, and most likely, better performance.  These are all very important factors in determining your long-term investment success.

What can I do at HyLine Wealth to help you get the benefits of Index ETFs?  If you think you would benefit from investing in low-cost, tax-efficient Index ETFs, you've come to the right place.  I use the Schwab platform and Schwab Index ETFs as a core component in managing my clients' investments.  Why?  Very simple.  Because they are among the best, lowest-cost Index ETFs on the market.  The total cost for the Schwab Index ETFs I use with my clients are lower than the total cost for comparable Vanguard Index ETFs.  And Vanguard is a company known for their low fees.  Also, because I use the Schwab platform, they waive their commission charge when I buy or sell their ETFs, which saves you even more.  These are all benefits I pass along to my clients.

Want more investment "tips"?  We have a lot more great ideas and suggestions to help you be smarter with your money.  CLICK HERE to get these "tips".

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Questions?  Don’t hesitate to reach out.  If you have questions on anything, feel free to email me at brock@hylinewealth.com or call me at (605) 275-2343.

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Brock Hyde
Investment Advisor
brock@hylinewealth.com

HyLine Wealth
5809 S Remington Place, Suite 101
Sioux Falls, SD 57108
Office (605) 275-2343

Location-Independent:  Pretty much wherever you are located, we can work together.  I am registered in the state of South Dakota and have an office in Sioux Falls.  The “de minimis exemption” allows me to do business in most other states (with only a few exceptions).  I consider myself "location-independent" as I use a heavy dose of technology to communicate and serve you.  This includes screen sharing technology, electronic signatures when possible, and shared client portals so we can view the same information at the same time.  Frankly, I can probably offer you better service than your "local" financial advisor.

HyLine Wealth is an investment adviser registered in the State of South Dakota. We do not provide tax or legal advice. Past performance is no guarantee of future results.  Always consult your financial advisor, tax advisor, attorney, and/or insurance agent before implementing any specific strategy to make sure it is right for you and your unique situation.  We are not responsible for the accuracy or upkeep of information on the links we provide to outside websites.  If/when we provide a link to an outside website, be sure to independently confirm the accuracy of any information.