Family Offices
The Growing Appeal of Exchange Traded Funds
By Russ Alan Prince
Russ Alan Prince is an international authority on private wealth creation and structuring. He is author of The Family Office: Advising the Financial Elite.
Exchange traded funds (ETFs) are investment funds that are traded like stocks. As an investment fund, an ETF can be comprised of various types of assets such as commodities or securities. Many ETFs track an index like the S&P 500 (for example, SPDR S&P 500) or some other basket of assets.
While many ETFs have always been popular with family offices, lately a growing number of single- and multi-family offices have increased their use of these investment vehicles. According to Michael Stevens, Managing Director of State Street Global Advisors and Director of National Sales for the Intermediary Business Group, “The family office community was among the early adopters of ETFs, and their acceptance is on the rise.”
Because single-family offices manage a large amount of money, ETFs are a way to cost-effectively diversify portfolios. “ETFs serve as core holdings as well as discrete satellite allocations or a means to express a market or asset-class call,” explains Stevens.
Even more telling, multi-family offices are significantly increasing their use of ETFs in their asset allocations for their affluent client families. When it comes to multi-family offices—where the family clients are generally less affluent than those who have established single-family offices—ETFs are attractive because they can be highly tax efficient, help diversify a portfolio and provide buying and selling flexibility.
With both types of family offices, transparency is a major investment concern. ETFs address this concern because their portfolios are transparent and they are reprised regularly during the trading day.
When exchange traded funds are used by family offices, the particular type of ETFs selected are very much a function of the family office’s orientation. There are two types of family offices based on orientation—Wealth Creators and Wealth Preservers. Wealth Creators tend to be more dominant and prioritize their efforts to enhance or increase the fortunes of the underlying families. “Family office professionals entrusted to grow client assets increasingly utilize our emerging markets and sector funds to participate in broad economic or narrower industry growth themes,” notes Stevens. “For example, there’s the recently introduced SPDR Global Natural Resource ETF (GNR) that provides a precise exposure to agriculture and minerals, as well as energy.”
In contrast, family offices that are Wealth Preservers prioritize activities that ensure the persistence of a given family’s assets. “For these types of family offices, there are domestic and international dividend funds, as well as commodity exposure such as the SPDR Gold Shares ETF (GLD), which is the largest gold-bullion-backed fund,” says Stevens.
The family office world is evolving and transforming at a prodigious rate. Consequently, the investment preferences of single- and multi-family offices are changing at the same pace. ETFs are playing an increasing investment role benefiting the wealthy family clients of these organizations.
Investing in ETFs and ETNs involves risks similar to those with any exchange-listed investment, including possible losses. Shares are not FDIC insured, may lose value and have no bank guarantee. Before investing in ETFs and ETNs, investors should carefully review available documents, including risk disclosures and other disclaimers included in the products’ prospectuses, and assess their suitability for their own financial circumstances.
