Exchange traded fund (ETF) wraps are another product you may encounter.
Relatively small in number, ETF wraps are gaining some popularity.
Not a topic to spend much time on, but I want to expose you to this investment approach.
Also, you can add a few useful investment terms to your vocabulary.
ETF Wrap
Whenever you see the term “wrap”, think of the associated product as a mix of investments wrapped together in a package. In this case, ETFs are lumped together and sold to investors.
How the ETFs are grouped for investment purposes may be the result of decisions by either the investor or a professional asset manager.
With investing accounts, always remember the term “discretion” Discretion is the ability to choose a specific course of action.
Discretionary Account
In a discretionary investment account, the asset manager chooses the specific ETFs held in the investor’s portfolio.
With an ETF wrap, the investor selects from a range of asset allocation options (e.g., 100% Canadian equities; 100 % Global equities split 10% Canada, 40% U.S., 50% other; Balance portfolio of 60% equities, 40% fixed income). The variety offered (and fees!) may differ between asset managers, so comparison shop if you want a managed, discretionary, ETF wrap account.
Once the investor decides on the mix, the asset manager makes the day to day decisions within those parameters.
Non-Discretionary Account
In non-discretionary accounts, the investor makes all the decisions. There may be investment advisors who provide advice and recommendations, but the selections lie with the investor alone.
As with ETF wrap discretionary accounts, the investor has to initially choose an asset mix.
But then the investor must also make the decisions as to the specific ETF investments among the available options. So there is more work involved for the investor.
Advantages
The arguments for using an ETF wrap account are the same as in all ETF versus open-end mutual fund discussions: often lower total expense ratios; no-loads or sales charges; increased liquidity; possible tax efficiencies.
As we have previously seen, these advantages may be true on average, but there are significant variances between individual ETFs and mutual funds. So do your analysis and due diligence.
With ETFs generally less costly than mutual funds, you can get professional management for less cost. The lower ETF costs may offset the money paid for asset management.
Further, the asset managers are only selecting investments from the pool of available ETFs. Compare this with mutual fund managers or asset managers in discretionary equity accounts. These managers must analyze a substantially larger investment set when making decisions. This increases their workload and should increase their costs and management fees relative to a manager that only needs to select from ETFs.
As such, professional management of an ETF wrap account should be cheaper than in an actively managed mutual fund or equity account.
Disadvantages
With discretionary ETF wrap accounts, you are paying for portfolio management, operating, and administrative costs.
Yes, management fees for ETF wraps should be less than in an actively managed account, but you are still paying for a service you may not need.
Conclusion
If this is something you think makes sense for you, feel free to invest in ETF wrap accounts.
I think though, that as your investment knowledge strengthens, you will be comfortable managing your own investment portfolio (made up primarily of ETFs and no-load open-end index mutual funds), so that you do not want to pay extra costs for these accounts.
