The exclusivity of Wall Street is eroding, as Main Street is beginning to receive the same access and benefits previously reserved for institutional investors. Much of this can be attributed to the proliferation of Index Funds and ETFs (Exchange Traded Funds), which have introduced far greater levels of efficiency and competition among money managers. At SWS Partners, we view ETFs as a more favorable way to grow wealth for most investors because they provide efficient diversification benefits and have comparatively lower fees than mutual funds.

Institutional investors are generally considered to be corporations, public pension plans, endowments, foundations, and the ultra-wealthy. Because the portfolios of these investors are often in excess of a few billion dollars, they enjoyed the benefit of intense competition among money managers for the right to invest their assets. This meant lower costs and access to the brightest minds on Wall Street. Comparatively, the typical individual investor was left with higher transaction fees and operating expenses, while having access to comparatively inferior research. This left individual investors with a grotesque disadvantage in their ability to create long-term wealth.

Much of this exclusivity is being shattered. This welcome change is overriding the exclusive mentality previously afforded to only elite investors. For example, the combination of reduced fees and the lack of breakpoints in ETFs has made portfolio re-balancing easier. This allows investors to more effectively keep their portfolio consistent with its strategic allocation and risk tolerance. Secondly, because there has been a race to the bottom in fees, we’re seeing asset managers compete in a new way: by making higher quality research more accessible. In fact, the problem now is not so much the lack of good research available, but rather the ability to process all of it effectively. This is pretty good problem to have, but nonetheless requires that your financial planner is diligent and organized in order to help investors implement the best ideas into their portfolios.

While some disparities still exist today, the gap is narrowing for institutional and individual investors. While they are not without risk, we think ETFs have allowed for institutional-quality investment capabilities for individual investors through reduced fees and, indirectly, by making quality research more ubiquitous.

As 2018 continues to be a bumpy ride for investors, SWS Partners will continue to look to ETFs as a more efficient way to build client portfolios while seeking to deliver institutional quality advice to its clients.