ETF Wrap
What Is an ETF Wrap?
An exchange-traded fund (ETF) wrap is a type of special investment portfolio where an investor — regardless of the aid of an investment advisor — puts exclusively in ETFs.
The piece of every ETF class is initially founded on a pre-chosen asset allocation model; it will occasionally should be rebalanced in response to changes in market values.
How an ETF Wrap Works
Common asset allocation models for ETF wrap fee programs are 100% equity, 100% fixed income, or a balanced model — both fixed income and equity. The decision of model relies upon an investor's age, tolerance to risk, income, objectives, and other personal factors. Investors can decide to manage an ETF wrap themselves in a non-discretionary account, or they might choose to have a professional advisor do as such for their sake (in a discretionary account).
As a general rule, through a wrap fee program, an individual investor is charged a predetermined fee or fees not dependent directly on transactions in that frame of mind for investment advisory services (which might incorporate portfolio management or counsel concerning the selection of other investment advisors) and execution of client transactions.
Advantages and Disadvantages of an ETF Wrap
Simplicity is one of the primary benefits of a wrap fee program. Clients pay an annual or quarterly fee for wrap products that manage a portfolio of investments — as opposed to paying individual commissions for trades. For advisers who charge fees in view of assets under management (AUM), these money management charges for wrap products frequently are extra — either charged to the client separately or through a higher adviser AUM fee to cover them.
ETF wraps are beneficial due to their low expense ratios when compared to mutual fund wraps. Moreover, discretionary wrap programs might offer investors asset allocation and rebalancing services to keep their portfolio in accordance with their investment objectives. An extra benefit of mutual fund wrap programs — admittance to fund managers ordinarily not accessible to retail investors — is less applicable to ETFs, which are all the more widely accessible direct from the ETF sponsor.
A potential disadvantage of wrap programs is that buy and hold investors — and those that trade inconsistently — are presenting themselves to superfluous fees by choosing for a wrap program (versus paying commissions for each trade). Wrap programs are expected to shield clients from unnecessary account movement — likewise called churning. However, the contrary problem can happen in the event that there's little trading in the account; the financial advisor may not be offering some benefit for the wrap fee being charged.
Advisors utilizing ETF and mutual fund wrap programs have likewise been known to charge high fees — as well as neglecting to enough reveal the brokerage commissions they pay to trade investments inside wrap programs. What's more, at times, wrap fees comprehensive of brokerage commissions are a lot higher than the commission costs borne by the advisor.
Highlights
- Simplicity is one of the primary benefits of a wrap fee program.
- An exchange-traded fund (ETF) wrap is a type of special investment portfolio wherein an investor — regardless of the aid of an investment advisor — puts exclusively in ETFs.
- As a general rule, a wrap fee program is one where an individual investor is charged a predetermined fee or fees not dependent directly on transactions in that frame of mind for investment advisory services and execution of client transactions.
- Common asset allocation models for ETF wrap fee programs are 100% equity, 100% fixed income, or a balanced model — both fixed income and equity; the decision of model relies upon an investor's age, tolerance to risk, income, objectives, and other personal factors.
- A potential disadvantage of wrap programs is that buy and hold investors — and those that trade rarely — are presenting themselves to superfluous fees by choosing for a wrap program (versus paying commissions for each trade).
