INVESTOR INFORMATION

THE ASSET CLASS

 

Global REITs (GREITs) provide an efficient, seamless, convenient, and liquid way to invest in companies that own properties across the globe. These properties include sectors that are not always available in the local market or in the private markets such as logistics, life science, self-storage, residential communities, and data centres.

They provide a tax-efficient means of distributing rental income to shareholders and having access to REITs globally means that a portfolio is diversified, not only geographically and through currency, but also through the various sectors that are available.

Why invest in REITs

REITs historically have delivered competitive total returns. This is based on high, steady dividend income and long-term capital appreciation.

Their comparatively low correlation with other asset classes also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.

REITs have the following characteristics:

  • Liquidity
  • Diversification
  • Dividends
  • Transparency
  • Performance

Liquidity:

REITs have historically provided:

•            Ability to buy/sell like other stocks, mutual funds, and ETFs.

•            Opportunities for tactical asset allocation.

•            Easy portfolio rebalancing.

Diversification

REITs have historically provided:

•            Low correlation with other stocks and bonds.

•            Higher risk-adjusted returns.

•            An investment in real, tangible assets.

Transparency:

It would be extremely difficult for REIT management to hide accounting irregularities for an extended period, as this would eventually affect their ability to pay out their required dividends.

Coupled with this is the fact that REITs are under inspection from analysts and underwriters that would soon pick up on any misnomers. REITs are publicly traded firms and therefore face a high degree of scrutiny. In the United States alone there are 30 firms that provide real estate equity research. REITs are not immune to scandals, but the structure of REITs reduce the probabilities of fraud significantly.

Dividends:

REITs have historically provided:

•            Dividends & wealth accumulation.

•            Regular income from rents.

•            Reduced portfolio volatility.

Performance:

REITs have historically provided:

•            Total returns above the S&P 500 over the past 25 years.

•            Higher returns than corporate bonds.

INVESTMENT APPROACH

Our view on investing in Global Property

At Reitway Global, we have a specialized investment approach that revolves around Global Listed Property. With a niche strategy, we focus exclusively on this asset class, allowing us to develop high-conviction views that drive wealth-enhancing performance over the medium and long term.

As a property fund manager offering both active and passive investment products, our investment philosophy is crafted to cater to the diverse needs and preferences of our investors while aiming to generate long-term value and consistent returns. We recognize and appreciate the unique characteristics and benefits of both active and passive strategies, and we seamlessly integrate them into our investment approach.

We believe in maintaining a patient and persistent investment mindset, aligning with the inherent nature of real estate as a long-term asset class. By adopting this approach, we can potentially deliver attractive returns to our clients while mitigating unnecessary risks.

Our investment strategy combines comprehensive research, rigorous analysis, and an in-depth understanding of the global listed property market. We continuously monitor market trends, identify investment opportunities, and carefully manage our portfolios to optimize performance.

Overall, our investment approach combines the best of active and passive strategies, tailored to the distinct demands of the global listed property sector. With a patient and persistent approach, we aim to generate long-term value and consistent returns for our investors.

The Investment process

At Reitway Global, we employ distinct investment processes for our active and passive products, each tailored to optimize performance and align with specific investor objectives.

Active Management for Active Products: In managing our active investment products, we adopt a proactive approach to REIT investing. Our experienced team actively identifies and capitalizes on asset class and sector inefficiencies, continuously seeking out undervalued companies that possess high-quality assets. Through comprehensive research, rigorous analysis, and hands-on management, we strive to optimize portfolio performance and deliver superior risk-adjusted returns to our investors.

Index Tracking for Passive Products: For our passive investment products, we implement an index tracking approach. These products are designed to replicate the performance of a specific property index. To closely match the index's performance, we construct a portfolio that mirrors the index's composition and weighting. Our focus is on cost efficiency and minimizing tracking error, while ensuring investors gain exposure to broad market trends and overall performance.

Regardless of the investment strategy, we place a strong emphasis on thorough research and due diligence. Our portfolio management team conducts rigorous analysis to identify investment opportunities, evaluate property fundamentals, assess market trends, and gauge risk factors. By employing this comprehensive approach, we ensure that both active and passive investment products are grounded in robust data, market insights, and a deep understanding of the underlying assets.

Through these investment processes, we aim to provide our investors with a diversified range of products that align with their risk tolerance and investment goals.

WHAT IS A REIT?

WHAT IS A REIT?

A Real Estate Investment Trust (REIT) is a company that owns, and in most cases, manages income-producing commercial real estate such as offices, apartments, warehouses, hospitals, malls, hotels and in some instances, even timberlands. REIT shares are traded on major stock exchanges, including London, New York, and Sydney.

REITs were created by the US Congress in the 1960s to give average investors access to investments in large-scale, commercial properties through the purchase of equity.

A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. As a result, most REITs remit up to 100 percent of their taxable income to their shareholders, who then pay taxes on the dividends received as well as any capital gains. As with other business, excluding partnerships, a REIT cannot pass any tax losses through to its investors.

INDUSTRIAL

  • Manufacturing
  • Logistics
  • Cold Storage

RETAIL

  • Malls
  • Shopping Centres
  • Freestanding and Strip Centres
  • Triple Net Lease

OFFICE

  • Traditional
  • Life Science
  • Co-working

RESIDENTIAL

  • Single Family
  • Multi Family
  • Manufactured Housing
  • Student

DIVERSIFIED

  • Diversified Property Portfolio of Mixed Types

LODGING

  • Resorts and Gaming
  • Hotels

HEALTHCARE

  • Hospitals
  • MOBs
  • Senior Housing
  • Skilled Nursing

STORAGE

SPECIALISED

  • Towers
  • Fibre
  • Data Centres
  • Ground Lease

RESOURCES

  • Timber
  • Farmland

WHY WERE REITs
CREATED?

US Congress created REITs in 1960 to make investments in large-scale, income-producing real estate accessible to average investors. Congress decided that a way for average investors to invest in large-scale commercial properties was the same way they invest in other industries — through the purchase of equity.

In the same way shareholders benefit by owning stocks of other corporations, the stockholders of a REIT earn a pro-rata share of the economic benefits that are derived from the production of income through commercial real estate ownership. REITs offer distinct advantages for investors: portfolio diversification, strong and reliable dividends, liquidity, solid long-term performance and transparency.

WHAT QUALIFIES A
COMPANY AS A REIT?

To qualify for a REIT, a company has to:

  • Distribute at least 90% of the company’s taxable income to its investors.
  • Have no more than 50% of shares held by less than five shareholders during the last half of each taxable year.
  • Have at least 75% of assets allocated to real estate.
  • Have at least 75% of gross income from rents or mortgages.
  • Have no more than 25% invested in taxable REIT subsidiaries.

HOW MANY TYPES
OF REITs ARE THERE?

There are three types of REITs, namely equity, mortgage and hybrid REITs.

Equity REITs mostly own and manage income-producing properties and operate them as part of their own portfolio. They engage in a number of real estate activities, including leasing, maintenance and development of real property and tenant services. Their revenues come principally from rentals generated by their properties.

Mortgage REITs loan money for mortgages to real estate owners, or buy existing mortgages or mortgage-backed securities. They generate revenues through the interest earned on mortgage loans and for the most part, extend mortgage credit on existing properties only.

Hybrid REITs as the name suggests, are a combination of both equity and mortgage REITs and invest in both properties and mortgages.

WHAT ARE THE
BENEFITS OF REITs?

REITs offer investors the following significant benefits:

  • Competitive long-term rates of return
  • Significantly higher dividends on average than other equities
  • Liquidity – REITs are traded on the major stock exchanges
  • Monitoring by independent directors, analysts and auditors, and the business and financial media
  • Management by skilled real estate experts
  • Portfolio diversification
  • Regulation

HOW MANY REIT
SECTORS EXIST?

There are currently 28 US REIT sectors and sub-sectors. Most REITs specialise in a single property sector, with diversified REITs investing in more than one. While some invest nationally or globally, others specialise in just one region.

US REIT Sectors:

  • Regional Malls
  • Shopping Centres
  • Free Standing Malls
  • Traditional Office
  • Life Science Office
  • Co-working Office
  • Industrial
  • Logistics
  • Cold Storage
  • Student Accommodation
  • Net Lease
  • Data Centres
  • Self-storage
  • Infrastructure
  • Timber
  • Towers
  • Healthcare
  • Lodging/Hotels
  • Diversified
  • Single-Family
  • Multi-Family
  • Manufactured Homes
  • Farmland
  • Prison
  • Gaming/Casino

WHAT TYPES OF
PROPERTIES DO REITs
OWN AND MANAGE?

REITs own and manage a variety of property types: shopping centers, health care facilities, apartments, warehouses, office buildings, hotels and others. Most REITs specialise in one property type only, such as shopping malls, timberlands, data centers or self-storage facilities.

Some REITs invest throughout the country or in some cases, throughout the world. Others specialise in one region only, or even in a single metropolitan area.

ETFs EXPLAINED

WHAT ARE ETFs?

An ETF is a pooled investment fund which can be bought and sold on a stock exchange.

  • ETF share prices fluctuate all day as the ETF is bought and sold. In comparison, mutual funds only trade once a day after the market closes
  • ETFs offer low expense ratios and fewer broker commissions than buying the stocks individually.
  • An ETF is a type of fund that holds multiple underlying assets, rather than only one like a stock. Because there are multiple assets within an ETF, they can be a popular choice for diversification.

TYPES OF ETFs

Today there are over 8000 ETF’s globally. Here are some of the lesser-known corners of the ETF universe.

Thematic ETFs:
Thematic ETFs are built around long-term trends such as climate change or rapid urbanization. By having more tangible focus points, these funds can also appeal to younger generations of investors.

Contrarian ETFs:
In a healthy market, there can be a variety of different positions being taken by investors. Contrarian ETFs help to make this possible, allowing investors to bet against the "herd".

Factor-based ETFs:
This approach uses a rules-based system for selecting investments in the fund portfolio, based on factors typically associated with higher returns such as value, small-caps, momentum, low volatility, quality, or yield.

Global Macro ETFs:
Some ETFs are designed to mimic strategies used by hedge fund managers. One example of such a strategy is global macro, which aims to analyze the macroeconomic environment, while taking corresponding long and short positions in various equity, fixed income, currency, commodities, and futures markets.

Global Macro ETFs:
Some ETFs are designed to mimic strategies used by hedge fund managers. One example of such a strategy is global macro, which aims to analyze the macroeconomic environment, while taking corresponding long and short positions in various equity, fixed income, currency, commodities, and futures markets.

Commodity ETFs:
There are ETFs that track gold or oil, sometimes even storing physical inventories. Interestingly, however, there are commodity ETFs for even more obscure metals and agricultural products, such as zinc, lean hogs, tin, or cocoa beans.

ETF APPLICATIONS

There are 10 familiar ETF applications, spanning from simple (ETFs for core application) to complex (ETFs as risk management overlays).

Tactical Adjustments:
Over- or underweight certain styles, regions, or countries on the basis of short term views. 72% of Institutions use ETFs for this purpose.

Core Allocation:
Build a long-term strategic holding in a portfolio. 68% of Institutions use ETFs for this purpose.

Rebalancing:
Manage portfolio risk in between rebalancing cycles. 60% of Institutions use ETFs for this purpose.

Portfolio Completion:
Fill in gaps in a strategic asset allocation. 57% of Institutions use ETFs for this purpose.

Liquidity Management:
Maintain exposure in a liquid investment vehicle to meet cash flow needs. 54% of Institutions use ETFs for this purpose.

Transition Management:
Facilitate manager transitions with ETFs. 44% of Institutions use ETFs for this purpose.

Risk Management / Overlay Management:
Mitigate market exposure while refining a long-term view. 42% of Institutions use ETFs for this purpose.

Interim Beta:
Maintain market exposure while refining a long-term view. 37% of Institutions use ETFs for this purpose.

Cash Equitization:
Put long-term cash positions to work with ETFs to minimize cash drag. 37% of Institutions use ETFs for this purpose.

ESG EXPLAINED

WHAT IS ESG?

Environmental, social and governance (ESG) is a framework used to assess an organization's business practices and performance on various sustainability and ethical issues. It also provides a way to measure business risks and opportunities in those areas. In capital markets, some investors use ESG criteria to evaluate companies and help determine their investment plans, a practice known as ESG investing.

While sustainability, ethics and corporate governance are generally considered to be non-financial performance indicators, the role of an ESG program is to ensure accountability and the implementation of systems and processes to manage a company's impact, such as its carbon footprint and how it treats employees, suppliers and other stakeholders. ESG initiatives also contribute to broader business sustainability efforts that aim to position companies for long-term success based on responsible corporate management and business strategies.

WHAT IS ESG INVESTING?

Environmental, social, and governance (ESG) investing refers to a set of standards for a company’s behavior used by socially conscious investors to screen potential investments.Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

ENVIRONMENTAL

Environmental issues may include corporate climate policies, energy use, waste, pollution, natural resource conservation, and treatment of animals. ESG considerations can also help evaluate any environmental risks a company might face and how the company is managing those risks.

Considerations may include direct and indirect greenhouse gas emissions, management of toxic waste, and compliance with environmental regulations.

Examples of the E in ESG criteria could be investing in companies that:

  • Publish a carbon or sustainability report
  • Limit harmful pollutants and chemicals
  • Seek to lower greenhouse gas emissions and CO2 footprint
  • Use renewable energy sources
  • Reduce waste

SOCIAL

Social aspects look at the company’s relationships with internal and external stakeholders.

Does it hold suppliers to its own ESG standards? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do workplace conditions reflect a high regard for employees’ health and safety? Or does the company take unethical advantage of its customers?

Socially responsible investing (SRI) is an investment strategy that highlights this one facet of ESG. SRI investors seek companies that promote ethical and socially conscious themes including diversity, inclusion, community-focus, social justice, and corporate ethics, in addition to fighting against racial, gender, and sexual discrimination.

Examples of the S in ESG criteria could be investing in companies that:

  • Operate ethical supply chains
  • Avoid overseas labour that may have questionable workplace safety or employ child labour
  • Supports LGBTQ+ rights and encourages all forms of diversity
  • Have policies to protect against sexual misconduct
  • Pay fair (living) wages

GOVERNANCE

ESG governance standards ensure a company uses accurate and transparent accounting methods, pursues integrity and diversity in selecting its leadership, and is accountable to shareholders.

ESG investors may require assurances that companies avoid conflicts of interest in their choice of board members and senior executives, don't use political contributions to obtain preferential treatment, or engage in illegal conduct.

Examples of the G in ESG criteria could be investing in companies that:

  • Embrace diversity on the board of directors
  • Embrace corporate transparency
  • Appoint someone other than the CEO as chair of the board
  • Stagger board elections

WHAT DOES ESG MEAN FOR A BUSINESS?

Adopting ESG principles means that corporate strategy focuses on the three pillars of the environment, social, and governance. This means taking measures to lower pollution, CO2 output, and reduce waste. It also means having a diverse and inclusive workforce, at the entry-level and all the way up to the board of directors. ESG may be costly and time-consuming to undertake, but can also be rewarding into the future for those that carry it through.

ESG AND REAL ESTATE

Once upon a time, real estate embodied the epitome of capitalism. The trend, however, is growing quite the opposite way. The application of ESG standards on real estate (notably by governments and developers in many developed countries) has shown that this asset class is also relevant when these guiding principles are being applied.

Awareness is growing that real estate can have a significant social impact either through the form of rehabilitation of public spaces (indirectly attributing value to existing real estate), affordable housing, social housing, and care centers, or through an environmental focus investment on new buildings such as green buildings.

ETF ECOSYSTEM

KEY

  1. The ETF issuer communicates the fund’s market trades as well as details of the creation/redemption basket to the Custodian, who in turn provides safekeeping of the assets, as well as providing the ETF Issuer with an aggregate snapshot of the portfolio.
  2. The ETF Issuer and Accounting/Custody work together to process and settle creation/redemption activity when there are orders.
  3. When a creation or redemption order is processed, Accounting/Custody processes the underlying basket and the transfer agent processes the ETF shares.
  4. In some operating models, the Authorized Participant places orders on the Primary Market with the Transfer Agent instead of directly with the Distributor.
  5. Authorized Participants may buy or sell excess shares to the market through market participants. Market Makers may engage Authorized Participants to facilitate creations or redemptions.
  6. Market Makers provide ETF liquidity by posting double-sided quotes on the national Stock Exchanges.
  7. Brokers who wish to buy or sell retail quantities of ETF shares will facilitate these transactions on the Secondary Market through one of the national Exchanges.
  8. Investors who wish to invest in ETFs will engage with a Broker, who buys or sells shares on their behalf.
  9. Large Institutional investors may buy or sell ETF shares on the Secondary Market through alternative trading venues such as OTC (Over-the-Counter) and Dark Pools.
  10. When a creation or redemption order is processed, the Medallion Distributor approves the order and provides final order details to Accounting/Custody.
  11. The Medallion Distributor provides the Transfer Agent with creation/redemption activity for record keeping, and the Transfer Agent maintains this data for the use of the Medallion Distributor in shareholder communications.
  12. Authorized Participants initiate creation and redemption activity on the Primary Market through Medallion Distributor systems, and the Medallion Distributor provides confirmations to Authorized Participants.
  13. ETF Issuers operate under various rules and regulations including the SEC for asset management activities, FINRA for sales activities, and the CFTC when certain derivatives are involved.
  14. The Investment Management division of the SEC monitors the Investment Advisor to ensure compliance with multiple federal regulations.
  15. The NSCC (National Securities Clearing Corporation) is regulated by the SEC.
  16. The Trading and Markets Division of the SEC monitors and works alongside Execution Venues to ensure efficient, transparent markets, as well as overall capital market integrity.
  17. FINRA regulates member brokerage firms and exchanges.
  18. FINRA monitors Brokers to ensure federal regulations are being followed. It also seeks to protect Investors from unscrupulous sales tactics.
  19. Compliance monitors the ETF issuer and funds for compliance with regulations, policies, and procedures.
  20. The Trustees monitor vendors and the general management of the trust to ensure shareholders’ rights and interests are being protected.
  21. The Legal team assists the ETF Issuer with contracts and provides general counsel. It also sets the agenda for regular and special meetings of Trustees.
  22. The Index Provider transmits daily index constituents to the ETF for the purpose of tracking the portfolio.
  23. Data Vendors communicate various data points such as securities pricing, corporate action information, and website informatics to the ETF Issuer and its service providers.
  24. The Sales Distribution team of an ETF issuer is usually in-house, but can be outsourced to a 3rd party.
  25. The Sales Distribution team works to sell the ETF to Investors.
  26. Marketing and PR sets messaging strategy as well as methods of communicating the ETF Issuer’s products to investors.
  27. Marketing and PR communicates key information about the ETF to Investors by shaping branding, educational content, and messaging, as well as arranging media opportunities and appearances.
  28. The investment Advisor monitors and manages the day-to-day operations of the ETF and its other service providers.
  29. Sub-advisor, if engaged, manages all or part of the investment portfolio of the ETF.
  30. A Sub-advisor may be engaged on behalf of the primary investment advisor to manage some, or all, of the portfolio’s assets.
  31. The Securities Lending Agent acts as agent of the Fund to manage the lending of portfolio securities. This service generally does not start until the fund has some scale.
  32. The Custodian and Securities Lending Agent work in tendem to facilitate the borrowing of securities with proper record-keeping.
  33. The Custodian transmits creation/redemption baskets nightly to the NSCC (National Securities Clearing Corporation) who then disseminates it to all member firms including back to the custodian.
  34. 34. The NSCC (National Securities Clearing Corporation) transmits ETF constituents to the IOPV (Indicative Optimized Portfolio Value) calculation agent each morning to generate estimated intra-day share price.
  35. The NSCC (National Securities Clearing Corporation) transmits official creation/redemption basket to Exchanges for public dissemination.

GLOSSARY

Accounting

Firm that calculates daily NAV.

Advisors

Entity that manages the investments of the ETF as defined in the prospectus.

Agency Brokers

Brokers only acting as agent on behalf of customers and not as principal trader for their own account.

Authorized Participants

Entities that transact in the primary market by creating and redeeming new ETF shares, which can then be sold in the secondary market.

Broker-Dealers

A firm that buys and sells securities for its own account as well as selling to customers.

Brokers

General term describing individual or firm that buys and sells securities on behalf of investors.

CFTC

Commodity Futures Trading Commission – US government agency that regulates the futures and options markets.

Compliance

Internal and external groups that monitor, detect, and prevent misconduct of rules designed by regulators.

Custodian

Firm that holds records of asset ownership as well as facilitating instructions for corporate actions.

Data

Vendors Firms that provide various data to vendors including pricing data, market data, data to populate the fund website, and more.

Discount Brokers

Brokers typically only offering bare-bones execution services without research and personalized advice.

FAs

Financial Advisers (FAs) typically operate through a broker dealer, are regulated by FINRA, and fall under the suitability rules.

FINRA

Financial Industry Regulatory Authority – A self-regulating organization that oversees organizations that facilitate the buying and selling of securities.

Full-Service Brokers

Brokers providing research and advice to clients in addition to executing trades.

Fund Administrator

Firm that provides legal, business, and financial support services to assist the ETF in operating as an ongoing entity.

iNAV/IOPV/IIV

Agent Indicative Optimized Portfolio Value. Real-time calculation that estimates the per share value of an ETF throughout the trading day.

Index Provider

Firm that generates the investment portfolio strategy, which will be the basis for the ETF’s investments.

Institutional

General term describing investors who invest on behalf of other investors, which are often, from a sales perspective, segregated for their unique needs and constraints.

Investment Management

The Investment Management division of the SEC works to protect investors through asset management industry regulation.

Legal

Internal and external groups that advise and protect companies as related to business law.

LMM/DLP/CLP

Different listing exchanges’ names for the entities that agree to provide simultaneous bid and ask quotes to ensure liquidity and an orderly market. These entities have clearly defined quoting obligations and incentives that must be met on an ongoing basis.

Marketing & PR

Group or firm that provides sales collateral, educational content, and advertising in support of asset-gathering and the sales force.

Medallion

Distributor Serves as the underwriter for new shares. Also facilitates dealer agreements and 12b-1 fees, if applicable.

NSCC

National Securities Clearing Corporation – the centralized security depository in the United States.

OTC & Dark Pools

Execution venues which allow larger buy side firms to transact while preserving some anonymity.

Primary Market

Also known as the new issues market, this is where buyers can transact directly with the issuers.

Registered Market Makers

Entity that may provide bid and ask quotes for an ETF but does not have the same obligations or incentives as the Lead Market Maker.

Retail

General term describing individual investors investing for their own account or through an adviser.

RIAs

Registered Investment Advisers (RIAs) typically operate through a state or SEC registered Adviser under the Adviser’s Act, are regulated by the state or SEC, and fall under the 40 Act fiduciary standard.

Sales Distribution

A firm’s sales team, whose job is to raise assets in an ETF by educating and selling to financial intermediaries and investors.

SEC

Securities and Exchange Commission – US government agency that oversees the financial markets to protect shareholders and create capital market integrity.

Secondary Market

This is where investors trade previously issued securities among themselves, without involving the issuers.

Securities Lending Agent

Financial entity that is willing to pay to borrow the underlying securities in the fund.

Self-Directed

Individuals making their own investment decisions.

Stock Exchanges

Markets where individual equity securities, including ETFs, can be bought and sold.

Sub-advisors

Firm hired by advisor to manage all, or a portion of, an ETF’s investment portfolio based on its specific objectives.

Transfer Agent

Firm that prepares and maintains documents and records related to shareholder accounts.

Trustees

Group that governs high-level ETF administration and strategy in order to represent and protect shareholders.

WHY INVEST IN ETFs?

Pros in investing in ETFs. Among them:
  • Diversification

    One ETF can give exposure to a group of equities, market segments, or styles. An ETF can track a broader range of stocks, or even attempt to mimic the returns of a country or a group of countries.

  • Trades Like a Stock

    Although the ETF might give the holder the benefits of diversification, it has the trading liquidity of equity. Because ETFs trade like a stock, you can quickly look up the approximate daily price change using its ticker symbol and compare it to its indexed sector or commodity.

  • Lower Fees

    ETFs have much lower expense ratios compared to actively managed funds.

  • Immediately Reinvested Dividends

    The dividends of the companies in an open-ended ETF are reinvested immediately. One exception: Dividends in unit investment trust ETFs are not automatically reinvested, thus creating a dividend drag.)

  • Limited Capital Gains Tax

    ETFs can be more tax-efficient than mutual funds. As passively managed portfolios, ETFs (and index funds) tend to realize fewer capital gains than actively managed mutual funds.

  • Lower Discount or Premium in Price

    There is a lower chance of ETF share prices being higher or lower than their actual value. ETFs trade throughout the day at a price close to the price of the underlying securities, so if the price is significantly higher or lower than the net asset value, arbitrage will bring the price back in line. Unlike closed-end index funds, ETFs trade based on supply and demand and market makers will capture price discrepancy profits.

While the pros are many, ETFs carry drawbacks too. Among them:
  • Less Diversification

    For some sectors or foreign stocks, investors might be limited to large-cap stocks due to a narrow group of equities in the market index. A lack of exposure to mid- and small-cap companies could leave potential growth opportunities out of the reach of ETF investors.

  • Intraday Pricing Might Be Overkill

    Longer-term investors could have a time horizon of 10 to 15 years, so they may not benefit from the intraday pricing changes. Some investors may trade more due to these lagged swings in hourly price. A high swing over a couple hours could induce a trade where pricing at the end of the day could keep irrational fears from distorting an investment objective.

  • Costs Could Be Higher

    Most people compare trading ETFs with trading other funds, but if you compare ETFs to investing in a specific stock, then the costs are higher. The actual commission paid to the broker might be the same, but there is no management fee for a stock. Also, as more niche ETFs are created, they are more likely to follow a low-volume index. You might find a better price investing in the actual stocks.

  • Lower Dividend Yields

    There are dividend-paying ETFs, but the yields may not be as high as owning a high-yielding stock or group of stocks. The risks associated with owning ETFs are usually lower, but if an investor can take on the risk, then the dividend yields of stocks can be much higher. While you can pick the stock with the highest dividend yield, ETFs track a broader market, so the overall yield will average out to be lower.