﻿ Univest | Business Matters | Spring 2013

Are Exchange-Traded Funds Right for Your Portfolio?

Randy Faulkner, Financial Advisor, Univest Investments, Inc.

Randy FaulknerUnivest Investments Inc.If you listen to the financial news or pick up a financial magazine, you are sure to have seen or heard about ETFs (exchange-traded funds). Here is a brief overview of ETFs and mutual funds and how they differ.

Mutual funds use a pool of investors' funds to purchase an agreed-upon blend of securities (stocks and/or bonds). Mutual funds have a fund manager that actively purchases, sells and holds securities for the benefit of the investors. In today's market, the mutual fund investor has a huge breadth of options with sector funds, index funds, growth funds, etc. Mutual funds generally have a sales charge and ongoing expenses to cover management team costs. The fund managers strive to outperform their competitors and their related index.

ETFs are similar to mutual funds in that they are generally a group of securities, but beyond the initial selection of securities, they are usually not managed by a fund manager, which reduces costs. The blend of funds initially purchased for the ETF usually stays in the ETF. The most common ETFs are in index funds such as the S&P 500.*

The primary difference between an ETF and a mutual fund is that an ETF trades in the market like an individual stock. The “stock” can be bought and sold during the market day (mutual funds are priced at the end of the day). Similar to a stock, an ETF doesn't reflect capital gains/losses until it is sold. Mutual fund capital gains/losses are reported for each security bought and sold throughout the year. This can make a significant difference for non-qualified investments. A disadvantage of ETFs is that the sell price of the “stock” could be lower than the underlying securities. Mutual funds have to be able to sell on demand.

Why would an investor want an ETF in their portfolio versus a similar mutual fund? To take advantage of lower management costs, better tax efficiency and the ability to buy/sell during normal trading hours.

Why would an investor want a mutual fund versus an ETF? To take advantage of a demonstrated history of performance, the potential for fund manager(s) to outperform respective indexes and the ability to leverage smaller investments.

At Univest Investments, we believe there is a place for both ETFs and mutual funds in a balanced portfolio. To learn more, contact a financial advisor at 215-721-2112 or investments@univest.net to schedule an appointment.

* Investors cannot invest directly in an index.


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