ETF wraps Better Than Mutual Fund Wraps

ETF wraps are gaining market share for a host of reasons, including the fact that they are generally much less expensive than comparable mutual fund portfolios. An article published by Dow Jones Newswires earlier this year, "ETFs Are Moving Into The Spotlight" by Tara Siegel Bernard, cited the expense ratio for the average domestic stock ETF at 36 basis points, compared with 88 basis points for the average domestic stock index fund. Yes, ETF wraps charge an additional layer of fees to cover trading, administration, and so forth, but so do mutual fund wrap programs. When the wrap fee is factored out, the cost difference comes down to the expense ratios of the underlying investments, and the ETFs really shine.

ETF wraps also have greater trading flexibility than their mutual fund cousins. Unlike mutual funds, which trade once per day, ETFs offer the flexibility of intraday trading. If the markets are rising or falling, investors can make real-time decisions regarding the disposition of their portfolios. While this may not be a significant advantage to longer-term ETF wrap investors, it can be a huge bonus for more active investors who constantly trade in and out of their ETF holdings.

On the tax efficiency front, ETFs are also superior to mutual funds. New investors do not inherit embedded capital gains, and large redemptions are handled with in-kind distributions of the underlying securities, so the bulk of an investor's capital gains tax liability is deferred until the investor sells his or her holdings. (See An Inside Look At ETF Construction for more information about ETFs and tax efficiency.)

A less tangible - but psychologically attractive - benefit of investing in ETFs (and, by association, ETF wraps) is the fact that ETFs remain untainted by the scandals that have affected the financial services industry in general and the mutual fund companies in particular. Adding to this psychological comfort level is the inherent transparency of ETF portfolios - investors always know exactly what is in the portfolio. This is not the case with mutual funds, which only report holdings on a periodic basis.

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