Exchange-traded funds, which have been around for 20 years, are becoming a more popular retirement vehicle as more people are learning about them. Theyve been growing like crazy, says Vern Sumnicht, founder and CEO of iSectors, a Wisconsin-based outsourced investment firm. Theyre going to continue to grow. I dont know why it didnt happen years and years ago.
Low cost is one reason. Expense ratios for ETFs are substantially lower when compared to most mutual funds, says Corey Purkat, a retirement specialist with JA Counter. ETFs can also serve in a supplemental capacity. An ETF could round out a strong strategy thats being fulfilled with mutual funds or some other strategy, Purkat says. Typically, ETFs dont require a minimum investment and can be traded anytime during the day, two more benefits, he says.
Too much trading, however, could lead to higher costs, Purkat says. Understanding the bid-ask spread the difference between what someone is willing to pay and the asking price can be complicated for a rookie investor, he says, and is another disadvantage with ETFs.
The focus is less about ETFs versus mutual funds and more about educating employees and helping them save for retirement, says Steven Schweitzer, senior vice president of product development and marketing at Ascensus. It is about the objectives, he says.
Advisers play a major role
Brokers and advisers play a major role with ETFs, which can only be bought and sold via brokerage accounts. An adviser should provide a client with all the necessary information before recommending an ETF, Purkat says. The adviser should educate them on the risks involved and have a conversation that involves multiple scenarios, he says.
Like anything else, advisers need to do their due diligence with ETFs, Sumnicht says, and theyll be pleased with what they discover thanks to a simple design that promotes efficiency. Offering three to five portfolios which should be managed by professionals with varying risk levels benefits employees more than giving them 25 mutual funds to choose from and trade on their own, Sumnicht says. Its like handing them a loaded gun, he says. Theyre gonna shoot themselves in the foot.
While ETFs are gaining popularity, Sumnicht says any change is a slow process. That goes for all sides plan sponsors, employees and advisers. The biggest barrier is just plain change, he says.
For employers, altering a plan can be agonizing, Sumnicht says. From a fiduciary standpoint, he sees plan sponsors moving toward ETFs because of their benefit.
For advisers, its all about staying competitive, Sumnicht says, and adapting to a changing environment is essential. Those who dont could lose business, he says. As soon as you stop changing, youre gonna get killed by a competitive disadvantage, Sumnicht says. Its just a matter of time and how long it takes people to go through change.
