The Exchange-Traded Funds Manual, Second Edition

CHAPTER 11

ETF Applications for Individual Investors and the Advisors Who Serve Them

ETF enthusiasts are hard to subdue once they start describing applications for their favorite investment instrument. However, the purpose of this chapter is not to advance the proposition that ETFs are the best investment idea to come along in at least a generation, however true that proposition might be. My purpose is to discuss ETF applications with appropriate balance and with emphasis on the economics of different ways to take and hold a position. The idea is to suggest possibilities, not to reach definitive conclusions.

Index ETF holding and (fund share) trading costs have generally fallen more rapidly than comparable futures and stock basket trading costs have declined since ETFs were introduced. In addition, the convenience of ETFs often overcomes slightly higher costs associated with some ETFs relative to the other financial instruments in an equity arbitrage complex. Of greatest interest to some readers will be suggestions for using ETFs to meet specific needs in integrating a group of accounts for an individual or family. A discussion of how to approach trading ETF shares to establish a preliminary asset allocation should send some readers back to Chapter 8’s discussion of ETF trading for a refresher. This chapter also describes how to compare the cost of trading and holding ETFs with the comparable costs for futures in risk management applications.

The context of this discussion of ...