September 14, 2023
What makes ETFs tax efficient?
ETFs may offer some advantages for tax-sensitive investors. We take a look under the hood of this investment vehicle to explain why these advantages are there.
Exchange-traded funds
ETFs are playing a major role in the evolution of investing. We offer investors ETFs that are on the leading edge of this change.
The evolution of ETFs
ETF investing used to be just about tracking an index as cheaply and passively as possible. Today, ETFs run the gamut from passive to strategic beta to a full range of increasingly specialized active strategies. ETFs have also branched out beyond equities to other asset classes, such as fixed income, commodities, and alternatives.
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1 Passive investing
- Typically tracks a market-cap-weighted index
- Market cap weighting may result in over concentration
- Get exposure to specific segments of the market, or the entire market
- Little or zero tracking error
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2 Strategic beta
- Tracks a rules-based index that isn't focused on market cap weight
- May avoid potential concentration of market cap weighting
- Combines elements of passive and active management
- Often based on academic research
- Higher tracking error than pure passive
- May be based on single factors (size, relative value, profitability, momentum, volatility, etc.) or may combine these factors in a multifactor strategy
- May be used for core portfolio positions, specific outcomes, enhance passive allocations
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3 Active investing
- Portfolio manager investment decisions and security selection, not tied to a market-cap-weighted index
- Greater manager flexibility based on assessment of current market environment
- Potential for outperformance/underperformance
- Higher tracking error than passive and strategic beta
- Typically higher turnover
- ETF may have less portfolio transparency (semitransparent active ETFs)
Key events in the evolution of U.S. ETFs
Timeline
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1993
First ETF listed
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2000
First strategic beta ETF
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2002
First bond ETF
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2008
First active ETF
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2011
First multifactor ETF
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2020
First semitransparent active ETF
Important disclosures
Source: Investment Company Institute, Morningstar.
Key metrics of the ETF universe
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$6.4T
Combined assets of all ETFs listed in the United States¹
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3,086
Total number of ETFs listed in the United States¹
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$598B
2022 was the second-best year ever for ETF flows²
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431
New ETFs launched in 2022³
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66%
of advisors said performance was the most important ETF attribute to them.⁴
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$86B
Inflows of continued interest in actively managed ETFs²
Important disclosures
1 ETF.com, as of 12/31/22. 2 “A Brutal Year in the Markets Doesn’t Rattle ETF Investors,” Morningstar, 1/3/23. 3 “ETF Launches Slowed in 2022 for First Time in 3 Years,” etf.com, 12/30/22. 4 Cerulli, 2022.
Beyond passive: strategic beta and active ETFs
ETFs have evolved to include a variety of ways for investors to gain market exposure, from the pure beta of traditional index strategies to fully active strategies that don’t adhere to an index at all. Strategic beta is thought of as a middle ground that combines the rules-based discipline of passive investing with the potential outperformance of active management.
Advisor adoption of ETFs is growing
Financial professionals are adding ETFs to their tool kits and investor portfolios as more strategies and asset classes become available. For example, more advisors are using ETFs for specific strategies, including sectors, fixed-income asset classes, alternatives, and thematic investing.
65% of advisors recommend and use ETFs with their clients.⁵
Source: “U.S. Exchange-Traded Fund Markets 2022,” Cerulli Associates, 2022. Some values may not total 100% due to rounding.
Important disclosures
5 2022 Trends in Investing Survey, Journal of Financial Planning.
What you need to know about buying/selling ETFs
Understand why net asset value (NAV) premiums/discounts may occur
Avoid trading at the market open/close
Use limit orders
Source: Morningstar data as of 12/31/21
Important disclosures
6 “The Tax Efficiency of ETFs Alleviated Some Pain for Investors in 2022,” Morningstar.com, 12/9/22. 7 “US ETF investors mainly motivated by tax loophole, study shows,” Financial Times, 2/15/21.
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Manulife Investment Management is an established asset manager with global resources and expertise extending across equity, fixed income, and alternative investments as well as asset allocation strategies.
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Learn moreDimensional Fund Advisors is a pioneer of multifactor investing. The company has applied ideas rooted in academia for decades and, today, it’s one of the most well-respected managers in the field. Dimensional’s systematic approach is backed by insight gained from decades of academic research and experience implementing rules-based strategies in competitive markets.
Dimensional is a trademark of Dimensional Fund Advisors LP.
Explore our ETFs
| Fund | Managed by | Morningstar category | Use for |
|---|---|---|---|
|
JHCB
Corporate Bond ETF
|
Managed by Manulife Investment Management | Morningstar category Corporate Bond | Use for High-quality income opportunities |
| Managed by Manulife Investment Management | Morningstar category Foreign Large Value | Use for Diversifying sources of income | |
| Managed by Manulife Investment Management | Morningstar category Intermediate Core Bond | Use for High-quality income opportunities | |
| Managed by Dimensional Fund Advisors | Morningstar category Foreign Large Blend | Use for Core international holding | |
| Managed by Dimensional Fund Advisors | Morningstar category Diversified Emerging Markets | Use for Core international holding | |
| Managed by Dimensional Fund Advisors | Morningstar category Large Blend | Use for Core equity holding | |
| Managed by Dimensional Fund Advisors | Morningstar category Mid-Cap Blend | Use for Core equity holding | |
| Managed by Dimensional Fund Advisors | Morningstar category Small Blend | Use for Core equity holding | |
|
JHPI
Preferred Income ETF
|
Managed by Manulife Investment Management | Morningstar category Preferred Stock | Use for Diversifying sources of income |
| Managed by Manulife Investment Management | Morningstar category Large Value | Use for Diversifying sources of income |
Important disclosures
Investing involves risks, including the potential loss of principal. These products carry many individual risks, including some that are unique to each fund. Please see the funds' prospectuses for additional risks. This material is not intended to be, nor shall it be interpreted or construed as, a recommendation or providing advice, impartial or otherwise. John Hancock Investment Management and its representatives and affiliates may receive compensation derived from the sale of and/or from any investment made in its products and services. John Hancock ETF shares are bought and sold at market price (not NAV), and are not individually redeemed from the fund. Brokerage commissions will reduce return.
Related viewpoints
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Dividend ETFs: looking beyond yield
High dividend ETFs available in the marketplace traditionally achieve their objective by investing exclusively in stocks with the highest dividends. We take a look at why taking a broader perspective might deliver better outcomes for investors across the market cycle.
August 7, 2023
The limitations of downside mitigation ETFs
During last year’s market downturn, some downside mitigation ETFs failed to shield investors from losses. We review the limitations of these ETFs and discuss what types of strategies might lead to better investor outcomes.
Learn more
Investors: Ask your financial professional how adding ETFs can help you better position your portfolio for the long term.
Financial professionals: Learn more about how ETFs combine some of the most attractive features of active and passive strategies.
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