#etf The biggest appeal of ETFs is that most ETFs do not distribute capital gains at the end of the year.
By comparison, certain mutual funds have capital gain distributions at the end of the year, especially those with large outflows that require managers to sell their holdings.
For Kathy Curtis, CFP and founder of Curtis Financial Planning in Oakland, Calif., ETFs offer "more control over the tax implications" of investing in a brokerage account.
"I live in California, which is a very high-tax state, so this is an important part of my practice and allows me to minimize my clients' taxable income," she said. .
How ETFs can help you diversify your portfolio
ETFs can also be used to balance risk and return in asset allocation strategies. ETFs can be considered part of a core portfolio or part of a satellite portfolio, says Margherita Chen, CFP and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
With exposure to a broad index such as the S&P 500, ETFs become a core part of her portfolio and provide stability as the fund tracks the overall movement of the index. Camila Elliott, an Atlanta-based CFP and co-founder and CEO of Collective Wealth Partners, says her firm primarily uses ETFs for its core portfolio holdings. He said that
By comparison, satellite portfolio ETFs offer diversification opportunities and reduce exposure to individual assets and risks. For example, Mr. Chen pointed to a client who was interested in opportunities in the video game industry and was able to find a video game ETF that matched his interests. There is no guarantee of the next big industry winner, even in the video game industry, so ETFs are a lower risk bet in this role than individual stocks, but they still have the potential for large losses or gains. there is.
ETFs are âa little more consciousâ
"(ETFs) can be very powerful just by being able to target customers a little bit more," Chen said.
Compared to mutual funds, ETFs allow individuals to decide where to invest their money by focusing on meeting their interests and needs, Chen said. Non-core ETFs often specialize in a particular sector, stock, or niche focus area, such as food system sustainability during climate change.
Elliott said he typically uses "developed markets, emerging markets, and ESG" mutual funds to complement his core ETFs.
