Exchange traded funds (ETFs) are models of versatility and efficiency. The Swiss Army knife of investments, ETFs have proven to be a multi-purpose investment tool able to do a large variety of things, and do them better than other tools. For instance, ETFs can provide the broad diversification of a mutual fund, but without the potential baggage of deferred sales charges. They can replicate an index with a lower MER than an index mutual fund. And, since ETFs trade like a stock, they have all the stock trading advantages, including real time pricing, limit orders and stop loss orders. Many ETFs even have options associated with them, which makes them particularly useful for risk management, hedging and other option related strategies.

Not only that, but ETFs are useful in cash management. Investing your client’s cash in an ETF instantly equitizes it, giving your client’s former cash position equity market returns. This gives you the time to make other investment decisions while still giving your client the opportunity for market returns.

Asset allocation is a snap with ETFs because they provide pure asset pools that do not suffer from style or asset class drift. This makes portfolio construction and maintenance simple. For those who believe they can exploit market inefficiencies, ETFs can be used in a “core and explore” approach whereby individual stocks or actively managed mutual funds are added to enhance an indexing core or base. Many ETFs are based on industry sectors, so sector plays and tilts can be swiftly and economically established and unwound.

ETFs are more tax efficient than conventional active mutual funds, and can be used to maintain asset exposure whilst tax loss harvesting. Simply replace your underwater stock or mutual fund with an ETF that covers the same market or sector. This lets you capture market movements without running afoul of the superficial loss rules.

Pull out all the functions of an ETF and you’ll find one impressive Swiss Army Knife of investments. Perhaps that Scout’s badge earned long ago will come in handy after all.

Sponsored by Barclays Global Investors Canada Limited Contact Howard Atkinson at howard.atkinson@barclaysglobal.com

Commissions, management fees and expenses all may be associated with Exchange Traded Funds. Please read the relevant prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. BGI’s ETFs, other than iUnits, are not qualified for distribution to the public in Canada as no prospectus has been filed for such funds with Canadian securities regulators.