ETFs Are Not a New Asset Class
How do exchange-traded funds (ETFs) fit into building a portfolio? While this is a common question, it’s of second order importance. First, investors need to consider what’s in the fund, regardless of whether those securities are held in a mutual fund or ETF. Does bottling a soda produce a fundamentally different product than the same thing in a can? I would argue it does not – it’s what’s inside the vessel that matters.
Looking inside the ETF bottle, fund characteristics vary substantially. Expense ratios, turnover, and diversification – all strong determinants of performance historically – exhibit wide ranges. An ETF wrapper is not a panacea for high-cost, concentrated strategies. Just like no container can help with the flavor of Mountain Dew.
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