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Exchange Traded Funds Usage

Exchange Traded Funds (ETFs) were introduced in 1993 to provide a cost-effective way for institutions and individual investors to buy and sell a group or basket of investments efficiently. An ETF is a security that tracks an index, a commodity or a basket of assets but trades like a stock on an exchange.  By owning an ETF, investors get the diversification of an index fund or a diversified portfolio of assets.  ETFs experience price changes throughout the trading day.  Institutions utilize them to gain greater diversification and liquidity, while individuals view them as an alternative to mutual fund investments.

ETFs can be bought and sold on exchanges similar to individual stocks. This allows for better liquidity and professional management opportunities for investors, and by continuously being valued in the market (versus mutual funds which are valued only at the close of trading) this provides a superior way to assist portfolio construction. The number of ETFs has exploded since their inception; however, specific equity market index portfolios are some of the largest and most widely used by investors worldwide. These index-based ETFs also carry extremely low embedded fees (many less than 0.10% annually) and reduced trading cost by some custodians.  All of this allows for better diversification, low cost and increased liquidity to create the appropriate portfolio structure to balance risk and return for each client.

Arcataur utilizes ETFs in a disciplined way to complement direct investments to truly create a level of diversification that allows for sound investment management. Most clients will hold a core group of index-based ETFs to complement direct common stocks. A broader array of equity ETFs will be considered to gain additional diversification where appropriate.  Total equity exposure through ETFs is primarily used for clients with lower assets levels where direct stocks are not feasible due to inability to balance diversification needs and trading costs or if clients hold direct stocks elsewhere.  

In a similar fashion for our fixed income portfolios we will utilize broad-based bond ETFs for most of our clients to achieve improved liquidity, diversification and portfolio structure.  Total portfolio duration can be adjusted efficiently through targeted bond segment and broad index-based ETFs.  Typically the fixed income portfolio for clients will be no more than 30% bond ETFs, while the remaining portion will be direct individual bonds.  Arcataur utilizes five core bond ETFs and will consider five others where additional diversification is required.

For clients who require specific exposure to commodities or targeted sectors we typically will utilize ETFs in these situations as well.

For a more detailed discussion on ETFs and how we use them at Arcataur Capital, please go to the Exchange Traded Funds (ETFs) link to the left or the educational resources section of the website.

The availability of these low cost instruments integrated with direct assets Arcataur purchases for our clients truly diversifies a portfolio. The enhanced diversification, liquidity and proper portfolio construction have the potential to improve long-term returns, reduce risk and offer more flexibility for clients of all sizes as well as to address special requirements.
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