The ETF Advantage

At Pinnacle, we have embraced the Exchange Traded Fund (ETF) universe for a variety of reasons, including low expenses, tax efficiency, and trade execution advantages. As their popularity has grown in recent years, ETF product offerings have grown as well, which provides us with a wider array of investment options to choose from. We currently use ETFs for all of our U.S. equity exposure. With diverse offerings in sectors and industries we can efficiently rotate our holdings as better value opportunities arise. Additionally, another big advantage in trading ETFs is that they trade intraday like a common stock, whereas mutual funds only trade at the end of the day. The intraday trading capabilities allow for more precise trading strategies such as stops and limits, and give me (in my role as Pinnacle’s Portfolio Trader) an opportunity to create value for our clients when favorable market conditions arise. Yesterday was a great example of that.

We recently decided to add a couple of new ETF positions in our models, funded by selling mutual funds and cash. We were able to execute all trades on the same day because mutual funds have a 1 day settlement and ETFs have a 3 day settlement. On the open yesterday the market fell 2% as concerns over Greece and the U.S. labor market weighed on investors. However, stocks started to stage a rally just before noon as news of a possible stock split in Apple made the rounds. For Pinnacle clients this presented a great opportunity to purchase the ETFs we had targeted to buy.

The two pictures below show the intraday movement in the Sector SPDR Energy Select ETF and the trade execution details (L: 12,355 @ $55.2531 means we bought 12,355 shares at a price of $55.25). The range of prices in this security was $54.72 to $56.04, and as I just mentioned the execution price for our purchase was $55.25. This was not the exact bottom but at the end of the day our purchases had already gained 1.44%. This is a gain we wouldn’t have been able to earn for our clients if we had used mutual funds instead of ETFs, since those orders would’ve executed at end of day prices.