Why Advisors Increasingly Use ETFs

Comparing ETFs to mutual funds, Alan Myers, president and senior portfolio manager of Aerie Capital Management in Baltimore, says, "For me, the best attribute is ease of trading during the day." Myers uses options, and the ability to write calls on ETFs is "highly beneficial."

Another attribute he appreciates about ETFs is that they "are easy to understand relative to an actively managed mutual fund," the advisor says. "It is one thing to say that a value-oriented mutual fund uses low price/book value as a starting point, but can you trust that they really do that? An ETF, because it has to follow the rules of an index, must use a low price/book ratio if that is where the index starts."

Other advisors echo Myers' thinking when it comes to the ease of intraday trading and transparency.

"ETF transparency is good because it is tied to an index; it's a defined process, even with equal-weighted, low-volatility or factor-based approaches," says John Diak, principal of Oatley & Diak LLC in Parker, Colorado, near Denver. "For a mutual fund shop, you're entrusting individuals and a track record [with client assets], and a philosophy might change," Diak explains.

In addition, low cost matters. "In my practice, ETFs offer a means to reduce the overall investment cost to a client," says Rob Shedd, a financial advisor with Addison Avenue Investment of Fort Collins, Colorado. "My goal is to always place clients in the best available investment at the lowest cost to them, and by incorporating select ETFs into strategies, I can accomplish this."

Don Roy, branch manager of New England Wealth Advisors in Merrimack, New Hampshire, agrees: "With costs being such an issue with clients, ETFs provide an alternative to assist in cost reduction while still creating a portfolio that is effectively diversified."