5 questions to ask your advisor about ETFs

More and more investors are looking at ETFs and wondering if they should incorporate them in their portfolios. Talking to your financial advisors about ETFs is a good start.

Exchange traded funds (ETFs) have joined mutual funds and individual stocks as mainstream investment tools, and their popularity is only growing. The past year saw record flows into stock and bond ETFs. Today, one in four U.S. investors owns ETFs, according to BlackRock’s ETF Pulse survey; half of all investors plan to purchase them in the next 12 months.

Whether you’re already an ETF investor or have just been hearing about them, you may be curious to know more or understand them better. This is a great conversation to have with your financial advisor.

Here are five questions (and brief answers) to help you get started.

1. What’s the difference between an ETF and a mutual fund?

ETFs and mutual funds have a lot in common: They’re both diversified, managed bundles of securities that are divided into shares, and bought and sold by investors. ETFs are traded on an exchange just like a stock and usually track an index; however, they’re also structured somewhat differently. These features mean they’re typically cheaper to own than mutual funds, through lower annual management fees and potential tax efficiency. For more information on the differences between ETFs and mutual funds, click here.

2. How do I use ETFs?

A key feature of ETFs is their versatility. Our Pulse survey found that the top ways investors use them are to increase diversification (53%), and gain exposures to broad market indexes (43%) and specific sectors (36%). What’s more, because there’s an ETF for almost any market sliver you can think of, many investors also look to ETFs as replacements for individual stocks (42%) and mutual funds (44%).

3. How might ETFs fit into an overall portfolio?

Think of ETFs as yet another powerful investment tool at your disposal, alongside mutual funds and other vehicles. As just one example, ETFs could be a cost effective way to build a diversified core portfolio, combined with actively managed mutual funds that target specific outcomes or manager skills. It’s ultimately about what you hope to achieve as an investor and getting the best value for your money.

4. Aren’t these risky?

Investors often use ETFs to mitigate risks in their portfolios through diversification. However, like mutual funds, they carry similar market risks to their underlying securities so they’ll be subject to forces such as interest rate changes, geopolitics and industry trends. So when you’re thinking about risk, it’s important not to shoot the messenger. It’s also important to know that ETFs aren’t exotic instruments: They operate within a well-functioning, well-tested infrastructure with a lot of oversight.

5. Are ETFs trading vehicles or buy-and-hold investments?

The answer is yes. You can easily trade them in your brokerage account (and they’re sometimes available commission-free) just as you would a stock, making it easy to express a short-term market conviction. However, there might be an even stronger case for ETFs long term, namely in the cost savings, which can really compound over time. Investor behavior bears that out. According to our survey, the average holding period for ETFs is about five years; and more than a third of ETF owners have held their investments for six years or longer.

Of course, the “right” way to build a portfolio depends on your particular goals. As more and more people turn to ETFs for a variety of uses, the best way to find out how they could work for you is to ask.

Hollie Fagan is the Head of BlackRock’s Registered Investment Advisor business and a regular contributor to The Blog.

About the survey

The BlackRock 2016 U.S. ETF Pulse survey was conducted from September 12–26, 2016, by TNS, an independent research company. The survey interviewed over 1,000 individual investors and 400 financial advisors, from nationally representative online samples of household financial savings/investment decision makers age 21–75, with $100K+ in investable assets and aware of ETFs; and financial advisors age 21–75 with $25MM+ in assets under management.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

Investment comparisons are for illustrative purposes only. To better understand the similarities and differences between investments, including investment objectives, risks, fees and expenses, it is important to read the products’ prospectuses. When comparing stocks or bonds and iShares Funds, it should be remembered that management fees associated with fund investments, like iShares Funds, are not borne by investors in individual stocks or bonds.

Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Diversification and asset allocation may not protect against market risk or loss of principal.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

©2017 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

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Originally published at www.blackrockblog.com on January 25, 2017.