So what are Exchange Traded Funds (ETFs)?
You have probably heard of publicly traded stocks and even mutual funds but most people are unfamiliar with the term Exchange Traded Funds (ETFs). It’s really quite simple; an ETF is a pool of stocks whose sole objective is to track and to replicate the performance of a target index or market segment, similar to the 500 stocks that comprise the S&P 500. Investors may purchase and sell ETFs at market prices on major exchanges throughout the day just like individual stocks. The option of active trading is not available with mutual funds because their buy and sale orders are executed after the various security exchanges are closed. ETFs therefore give the investor the advantage of owning a group of securities like a mutual fund but offers the investor the flexibility to trade that basket of securities anytime during daily trading hours.
The many advantages with an ETF
Low Cost – Professional investment management costs to maintain ETFs are generally much lower than the costs of mutual funds. The management cost for ETFs when expressed as a percentage of assets in the pool, range from 1/10% to 1.0% while similar costs for mutual funds can generally range from 1.0% to 3.0%. ETFs also do not charge front end or back end loads that can be imposed by mutual funds.
Tax Efficient – The strategic objective with ETFs is to achieve maximum tax efficiency while minimizing unexpected capital gains that may occur with mutual funds. For example, investment managers of a mutual fund may be forced to sell their securities in the pool of investments to generate cash to meet withdrawal requests. Gains on those sales that are not offset by losses are passed through to the owners of the mutual fund. With ETFs, investors sell their positions on the exchanges to other investors similar to selling an individual stock. This sale will rarely trigger capitals gains for the ETF or other holders of the ETF. Of course, the investor must pay personal capital gains tax on gains between the initial purchase and the selling price of an ETF, like gains on an individual security.
Diversification – Today over $1.1 trillion in assets are held in ETFs in the U.S., representing various market segments and indexes. Using ETFs, professional investment firms like Members Trust Company can diversify an investment portfolio over a wide spectrum of market sectors and industries. Buying individual stocks to achieve this diversification could be cost prohibitive, but ETFs enable investment firms to allocate assets to particular markets in a very cost effective manner. For example, an investment firm that allocated $20,000 to the S&P 500 would have to purchase 500 stocks at an average trade of $40.00, but using an ETF strategy, that same firm could make one $20,000 trade of an ETF that tracks the S&P 500.
Trading – Having the ability to trade ETFs throughout the day gives investment firms the flexibility to adopt more advanced investment strategies like limit orders, stop-loss orders, and even puts and calls. Also, the investment manager can react to market news real-time rather than waiting until the exchanges close to complete the trade as with mutual funds.
Members Trust Company, an investment leader using ETFs
In 2004, our Investment Team with Members Trust Company adopted the strategy of using ETFs in portfolio design, making us one of the first trust companies in the United States to recognize the lower cost and tax efficiency of ETFs. In a survey on Forbes.com, Members Trust Company was the top ranked ETF advisor in 2008. John Largent, CFA, CFP®, CAP, our Chief Investment Strategist is recognized in the industry as an innovator and subject matter expert in ETFs. He was quoted in “Kiplinger” about the low cost of ETFs, and served as a panel speaker on International ETFs at a symposium at the Financial Planning Association (FPA) Annual Conference.
Integrating ETF Portfolio Advantage® with your current holdings
So, what if you already have quality stocks with low tax basis? Members Trust Company will evaluate your current holdings and customize an ETF portfolio around those securities that are retained. Many investment firms require investors to sell all their current holdings so they can start with only cash. Members Trust Company understands the adverse tax consequences that can occur when selling securities with low basis just to accommodate the operational process of the investment manager. Our Investment Team will strive to achieve optimum tax management of your portfolio by offsetting gains in the securities you transfer over with losses that may occur with your ETF holdings.
Fiduciary Process to manage investment risk
When we design a customized portfolio, our goal is to manage risk as we meet your long-term investment objectives. We understand each of our clients has unique circumstances and issues that will determine their risk tolerance, liquidity needs, investment time horizon, tax sensitivity, and target return. Our investment team uses these factors to develop an investment strategy for your “ETF Portfolio Advantage®” investment account. We document our mutual understanding of your needs and goals by reducing our investment plan down to a written document referred to as your Personal Investment Policy Statement. This document will state your investment objective, any specific directives or constraints that you wish for us to follow, and an Asset Allocation schedule which sets target investment ranges. This information will function as a blueprint to build your customized “ETF Portfolio Advantage®.” Our investment team also sets Portfolio Benchmarks for our ETF Portfolios to better measure investment performance.
Our investment team monitors and tracks the performance of your “ETF Portfolio Advantage®” investment account against Performance Benchmark and Asset Allocation targets set in your Personal Investment Policy Statement. We will realign and re-balance your investments as needed to keep your portfolio within the ranges of your Asset Allocation schedule to maintain asset diversification, which is critical in managing investment risk. Annually or upon notice of a change in circumstance, we will meet with you to monitor any life changes that may have occurred in order to maintain your Personal Investment Policy Statement’s compatibility with your life cycle and circumstances.
Guided by the Strength & Values of America’s Credit Unions
Members Trust Company, owned and managed by America’s Credit Unions, is truly a unique investment firm. Since 1987, we have provided trust and investment services to credit union members and private clients abiding by the management philosophy of our owners to act in the best interest of our clients and fulfill our fiduciary duty as a trust company. Our owners, with over $180 billion in assets, provide Members Trust Company with its strategic values and underpin our strength as a national investment firm.
As a special purpose federal thrift, Members Trust Company is regulated by the Office of the Comptroller of the Currency, a federal banking regulator which oversees banks and trust companies. In addition to this federal agency, the National Credit Union Administration and the FDIC have regulatory oversight authority over our operations.
Just like credit unions, Members Trust Company embraces a hybrid purpose – a regulatory mandate to be profitable and a corporate responsibility to support the ideals and values of our credit union owners to provide financial services for your financial security and protection. So, Members Trust Company is accountable not only to our clients to discharge its fiduciary duty but to our credit union owners. Simply stated, credit union shareholders charge Members Trust Company with the duty to apply the credit union philosophy of “members first” as we deliver investment products and services.