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ADVANTAGES OF ETFs

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I received such positive feedback on my interview with Shankar Iyer of Merrill Lynch that I decided to offer you more investment insights from Mr. Iyer.

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Because of the tremendous growth within the Exchange Traded Fund (ETF) Industry (an 18% increase from April 2013 through April 2014 in “Assets Under Management” (AUM) held by U.S. ETFs), I asked Mr. Iyer: “How appropriate ETFs are as an investment vehicle for Chicago-area investors?”

Here is my interview with Shankar:

SHANKAR: Thank you for inviting me back, Tom! That is a great question.

ETFs are a relatively new investment instrument that has ballooned during the last decade to over $2 trillion in assets globally. With proper understanding and guidance they can be appropriate investment vehicle for Chicago investors.

However, there are many considerations to keep in mind when evaluating if an ETF is right for you:

Current ETF offerings provide exposure to almost every available asset class, including:

a) equities,

b) fixed income

c) commodities

d) currencies

e) alternative investment strategies

In addition, ETFs are available that utilize multi-asset strategies; and there are strategies that utilize leverage within a bullish or a bearish strategy (the latter ETFs are called “Inverse” ETFs).

TOM: Absolutely, Shankar. In fact, the evolution of ETFs, as well as the innovation within the industry, now makes it possible for a diversified investment portfolio to be created for each investor at a much lower required account balance level than has ever been possible before! Once the investor gains clarity on her/his risk profile, investment goals, and market stance, a portfolio can be easily constructed that fits their needs perfectly. That is pretty exciting!

SHANKAR: Yes, Tom, it is. And it is wonderful for advisers at Merrill Lynch because we now have so many more “tools” through which to serve our clients. Every week, one or more new ETFs become available that are especially designed to match a specific index or offer returns based on a particular strategy.

For example, thousands of investors are aware that, over the long term, stock market returns are a great way to stay ahead of inflation. However, they remember the steep drop in the market between 2008 and 2009, and they have seen big moves in the market since then (such as after U.S. Treasury Debt lost its Triple-A rating). Their risk tolerance is adverse to too much volatility.

For those investors, we now have a wide variety of “Low Volatility” or “Minimum Volatility” ETFs, plus we have “Hedged” ETFs that, when used within a larger portfolio, can reduce market volatility. Of course, we also have ETFs that focus on “Emerging Markets”, “Frontier Markets”, “Global Bonds”, “High Dividend Stocks, and even “Smart Beta”.

TOM: Shankar, I’ll bet that some of our readers our scratching their head about what “Smart Beta” is. I find that relatively new strategy set to be intriguing! But it does require some education about what the term means! Maybe we’ll get to that in a future article.

Tell us more about why ETFs are appealing.

SHANKAR: Sure. Whenever a new ETF is created, the investment experts involved in its design focus upon ensuring that the ETF’s “Strategy” (whatever it might be) is made “tradable”. What this means is that the ETF is designed to minimize “tracking error” by maximizing the ETF’s ability to both replicate and optimize the way that strategy is supposed to function within the global market.

So, Tom, let me summarize for your readers the appeal of ETFs within our current investment environment:

a) ETFs offer investors easy access to a wide range of asset classes and sectors;

b) ETFs operate within a low-cost, transparent, liquid and largely tax-efficient structure;

c) ETFs offer retail investors exposure to markets previously difficult to access;

d) ETFs have spurred the creation of innovative portfolios.

Finally, Tom, despite the fact that ETFs have already grown so popular that their trend graphs are practically straight up from lower left to upper right, we are confident that the ETF industry will continue to show above average growth. Two particular areas that are sure to witness an increasing number of ETFs include: 1) Actively Managed ETFs; and 2) International Growth ETFs.

TOM: Thank you so much, Shankar. We appreciate your time and expertise.

In order to provide visual support to Shankar, I have posted some slides in the “Slide Show” to illustrate some key characteristics within the ETF space. Make sure you take a look at them!

Mr. Iyer serves Merrill Lynch as a Senior Vice President and is available to clients as a Wealth Management Advisor. His specialties include investment strategies, goal-based planning, and wealth transfers. If you would like to contact Mr. Iyer, you may reach him at 312- 269- 5166. In addition, if you want to access a solid source for education regarding investments, consider looking at this site:

http://learning.merrilledge.com/?category=MLFLC-IE&subcategory=MLFLC-IB&content=202 and/or

the Verschuur/Iyer Group: http://www.totalmerrill.com/WM/system/viewfapage.aspx?pageurl=VIGROUP

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