Is an SMA Better Than an ETF?

This short video explains the differences between ETFs and SMAs and outlines the advantages an SMA can offer.

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Disclosure: Comparing the management or performance of a separate account to a mutual fund or exchange-traded fund is not a true and equal comparison due to differences in guidelines and restrictions, fees and expenses, and cash flows, among other factors. Because of these disparities, investors and clients are cautioned against undue reliance on separate account and fund performance comparisons.

[TRANSCRIPT]
For many passive investors today, one choice stands out above the rest, ETF, as in Exchange-traded Fund. With their ability to track an index in a single security, ETF’s are a compelling vehicle for many passive investors. But while ETFs are a popular way to get broad market exposure, they’re not the only way. A custom SMA—or separately managed account—can also deliver broad market exposure but with additional advantages. That’s because unlike an ETF, where the investor purchases fund shares, in a custom passive SMA the investor owns the underlying securities that live in the benchmark. And ownership enables a level of control you simply can’t get with an ETF. Take, for example, the impact taxes can have on returns for an investor, since even in a market trending up many stocks fall, the SMA investor can sell those individual securities, the ETF investor can't. This process, known as “tax-loss harvesting,” can offer a lot of value to the SMA investor. Third-party research has shown that systematic year-round tax loss harvesting can add 1%-to-2% in after-tax excess returns. Nothing compares with additional return on an investment, but customization is a close second, and an SMA can also deliver that. Like an ETF investor, the SMA investor can choose among popular benchmarks, but the SMA investor can also blend benchmarks. And can then apply certain investment factors to up the level of personalization. Or the SMA investor can reflect their ESG values—eliminating individual companies such as fossil fuel producers or tobacco makers. And there’s always the option to think beyond equities entirely since an SMA can also be constructed for fixed income or balanced mandates. Put all these possibilities together, and custom SMA investors can enjoy precisely the market exposure they want and nothing they don’t. It’s no wonder, then, that while ETFs aren’t going anywhere. S, M, and A are the three letters more advisors and their clients want to know. Explore whether a custom passive SMA is the right choice for your high-net-worth clients at customtothecore.com.