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What Are ETFs?
EFTs (Exchange-Traded Funds) are diversified portfolios of assets, such as stocks, bonds, or commodities, that can be traded like regular stock. They provide a simple way to gain exposure to multiple markets whilst benefiting from increased liquidity and reduced costs compared to mutual funds. They can be passively managed, tracking an index like the S&P 500, or actively managed, where investment decisions are made by professionals.
Enhancing Portfolio Diversification with ETFs
Instead of purchasing multiple individual stocks or bonds, investors buy a single ETF that holds a range of assets. This spreads risk, reduces the impact of poor performance from any one security, and delivers diversification.
As economic and technological innovations reshape global markets, focused strategic ETFs offer investors a chance to capitalize on high-growth sectors. Whether it's reshoring, electrification, or advanced healthcare, these funds position investors to benefit from long-term trends while maintaining diversification.
RSHO – American Reshoring ETF focuses on the resurgence of domestic manufacturing in the United States. The fund invests in industrials, automation, and materials, benefiting from shifts in supply chains to local production.
CANC – Oncology ETF is dedicated to companies developing cutting-edge cancer treatments. It includes biotechnology and pharmaceutical firms at the forefront of oncology research. The increasing demand for innovative medical solutions for this unmet medical need creates potential for high returns.
VOLT – Electrification ETF provides exposure to a potential $7 trillion1 investment opportunity across generation, grid modernization, and electrification of the global economy. The fund’s strength lies in exposure across the entire electrification value chain, where investment is needed to meet growing power demand from reshoring, data centers and electric vehicles.
HRTS – GLP-1, Obesity & Cardiometabolic ETF focuses on companies working on obesity treatments and metabolic healthcare solutions. Given the growing demand for GLP-1 therapies and increasing public health concerns, we believe this ETF is well-positioned in a high-growth sector. HRTS is best suited to those with a long-term outlook on the evolution of metabolic healthcare.
TOLL – Monopolies and Oligopolies ETF invests in companies with dominant market positions, such as railroads, toll roads, and payment networks. These businesses benefit from high barriers to entry and steady revenue streams, making TOLL an attractive option for investors seeking stability.
Liquidity, Flexibility, and Cost Efficiency
A key advantage of ETFs is their liquidity. Since ETFs trade on stock exchanges, they can be bought and sold throughout the trading day, allowing investors to react quickly to market conditions. Mutual funds, by contrast, are only priced once per trading day, which suits investors who prefer a structured, end-of-day valuation.
While passive ETFs have gained popularity for their low-cost, index-tracking approach, active ETFs are emerging as a compelling alternative for investors seeking professional management with the flexibility of intraday trading. Active ETFs combine the expertise of active fund managers with the efficiency and transparency of the ETF structure, offering a dynamic way to capitalize on market opportunities.
With global ETF assets surpassing $10 trillion2 in 2024, the landscape continues to evolve, giving investors more choices than ever. Active ETFs, in particular, provide a cost-effective alternative to traditional mutual funds while still benefiting from active oversight and strategic decision-making. As more investors look for a balance between flexibility and professional management, active ETFs are becoming an increasingly attractive option.
Tax Efficiency Advantages of ETFs
Unlike mutual funds, which frequently distribute taxable capital gains to investors, ETFs use an in-kind creation and redemption process. This allows providers to minimize capital gains distributions by removing low-cost-basis securities without triggering taxable events. As a result, investors are less likely to face unexpected tax liabilities.
An example is the SPDR S&P 500 ETF (SPY), which has not distributed capital gains in decades. This allows investors to defer taxes until they decide to sell their shares. In contrast, many actively managed mutual funds distribute annual taxable gains to shareholders, reducing long-term after-tax returns.
Mutual fund investors are often subject to capital gains taxes even if they do not sell shares, as fund managers frequently trade within the fund. In 2018, more than 60%3 of U.S. mutual funds distributed capital gains, compared to just 6.2% of ETFs. Even in down markets, mutual fund investors often receive taxable distributions, creating a tax burden even when they experience losses. By contrast, ETFs largely avoid this issue, making them a preferred option for taxable accounts.
Additionally, ETFs offer enhanced tax management through the in-kind redemption process. For example, when large investors redeem ETF shares, they receive a basket of securities instead of cash, preventing the fund from realizing taxable gains. Mutual funds, on the other hand, typically sell securities to meet redemptions, generating taxable gains that are passed on to all shareholders.
For investors in tax-advantaged accounts such as IRAs or pensions, ETFs further enhance long-term tax savings by limiting distributions that might erode wealth over time. This reinforces their appeal as a core component of retirement and wealth-building strategies.
Accessibility and Innovation in ETFs
ETFs have become crucial in making investment opportunities more accessible by providing access to niche, innovative markets. Historically, gaining exposure to specialized sectors such as advanced healthcare, industrial reshoring, and electrification required extensive capital or industry-specific knowledge. ETFs have simplified this by offering investors a cost-effective and transparent way to enter these markets without requiring deep expertise in individual companies.
The introduction of thematic ETFs has allowed investors to target emerging industries with significant growth potential. This accessibility is particularly beneficial for retail investors who may not have the resources to invest directly in multiple individual stocks across a sector.
Moreover, ETFs have continuously evolved to reflect market trends and investor demand. The increasing variety of ETF products demonstrates their adaptability, from the early days of index tracking funds to today’s highly specialized thematic and actively managed ETFs.
Bottom Line
The ETF landscape continues to evolve, with investors moving away from high-cost mutual funds and into more efficient, liquid, and tax-advantaged ETFs. With inflation, interest rate shifts, and geopolitical risks shaping the market, sector-focused ETFs provide a way to stay ahead of trends. Investors should evaluate where ETFs fit within their portfolios and consider leveraging thematic funds for growth-driven opportunities.
