ETF Investing

QuietGrowth has adopted ETF investing. Our portfolios are constructed using ETFs. We believe that using ETFs in different asset classes while constructing an investment portfolio is an excellent way to achieve a diversified, low-cost, high-quality portfolio. So, let's learn more about ETF investing.

What is an ETF?

ETF is an acronym for an exchange-traded fund. It is a basket of securities, such as stocks, bonds, commodities or currencies, grouped as per a rule. Usually, that underlying rule is to track an index.

Some of the desirable characteristics that one should look for in an ETF are low expense ratios, minimal tracking error, low bid/ask spread costs, sufficient liquidity and minimal lending of the underlying securities of the ETFs.

The price of an ETF changes throughout the day whereas the price of a mutual fund changes once a day. This is a key difference between an ETF and a mutual fund, even though a mutual fund is also a basket of securities. Another important difference is that an ETF is usually more tax-efficient than a similar mutual fund.

Using ETFs in a portfolio

The financial instrument ETF was first structured in the 1990s, and it is gaining popularity since then. The number of available ETFs and size of certain popular ETFs are increasing, while the cost of many ETFs is decreasing mainly due to increased competition. These developments have enabled the emergence of ETFs with desirable characteristics in different asset classes. A portfolio manager now has more significant means and flexibility to construct a high-quality portfolio if she uses ETFs. Refer to our Investment Methodology to learn more about how we construct QuietGrowth portfolios using ETFs.

Using ETFs instead of individual stocks and bonds

We suggest using ETFs in portfolios because we believe ETFs have various advantages. ETFs are a convenient and cost-effective way to diversify an asset class in a portfolio. So, opting for a few ETFs in a portfolio is preferable to opt for a few thousand individual stocks and bonds to achieve the same level of diversification of the portfolio.

Using ETFs in a portfolio is cost-effective in spite of the ETF management fees incurred for each of those ETFs. Savings achieved across various costs including the trading fees, bid-ask spreads and portfolio administration expenses ensure that opting for ETFs in a portfolio is cheaper than opting for thousands of individual stocks and bonds.

Trading fees are lower if we opt for fewer ETFs instead of a few thousand individual stocks and bonds. The bid-ask spread can be low for ETFs that we prefer in our QuietGrowth portfolios, whereas the bid-ask spread can be high for certain individual stocks with low liquidity.

Portfolio administration expenses are lower if we opt for fewer ETFs instead of a few thousand individual stocks and bonds. For example, whenever we modify the portfolio mix by altering the allocation of various asset classes, it is easier to implement that modification when we use ETFs to represent these asset classes.

Similar is the case of opting for bond ETFs instead of individual bonds.

(Please note that the trading fee is included in our QuietGrowth MDA fee, whereas you incur the ETF management fees and bid-ask spreads. Refer to our Pricing page for more information.)

There are other advantages of opting for ETFs. For example, ETFs can be more tax efficient. This advantage is because of lesser realised capital gains tax incurred by the ETF issuer while managing that ETF, compared to us trying to replicate the ETF ourselves by buying and selling a large number of individual stocks.

Using separate ETFs instead of a multi-asset ETF

A multi-asset ETF, which acts like a ‘fund of fund’, can consist of multiple unlisted managed funds or ETFs or a combination of both.

We suggest using separate ETFs in portfolios instead of a multi-asset ETF which consists of unlisted funds. This is mainly because unlisted funds can be less attractive than similar ETFs from a tax perspective.