Exchange-traded funds (ETFs) have been surging in popularity, with global assets under management (AUM) growing a record 27% in 2024 to reach $14.6 trillion. Despite this boom, many of your clients may still not understand ETFs or how they fit into their portfolios.
In uncertain times like the mid-2020s, it’s especially important to help clients feel informed and secure, and ETFs offer an excellent chance to do that. Below, we explore how you can educate clients about these funds to make them feel confident and reinforce your value as an advisor.
Key Takeaways
- While ETFs have been growing in size, many clients may still be unfamiliar with how they work.
- Advisors should have regular conversations with clients about how ETFs work and their benefits, such as the ability to trade them like stocks and their tax efficiency.
- Consider spending extra time addressing their concerns about volatility, which are common because of the visibility of ETF share price changes.
- These practices help demonstrate your value and position you as a trusted advisor, not just a product picker.
Clearing Up Common Client Misconceptions
Despite their growing popularity, many clients still hold misconceptions about ETFs, especially those who have only invested in mutual funds. Much of the confusion stems from how ETFs are traded on exchanges, like individual stocks.
For example, clients may think that ETFs are singular, stand-alone assets rather than baskets containing many investments. Others assume ETFs are inherently riskier than mutual funds, mistaking the changes in share price for actual shifts in real value.
Clarifying how ETFs work is a crucial first step in helping your clients become confident enough to invest in them. Often, the most effective approach includes using metaphors to make the concept more relatable.
“I tell people to think of ETFs like playlists,” said Eric Croak, a certified financial planner (CFP) and president at Croak Capital. “You do not buy every song separately; you stream a curated set built around a mood or theme. ETFs work the same way. You get a group of stocks or bonds working toward a goal, like income or growth, and you do not have to manage each holding on your own.”
This can also help clients understand how ETFs relate to mutual funds. They’re not exactly the same, but they serve a similar purpose: both are investments that offer diversified exposure to multiple underlying assets. “In reality, an S&P 500 ETF holds the same stocks as an S&P 500 mutual fund,” Croak said. “It’s like two different wrappers on the same candy bar.”
Focusing on the Benefits of ETFs
Once your clients understand what ETFs are and how they work, you can introduce them to the reasons behind their rising popularity.
Consider starting with the intraday trading feature. Far from being a sign of increased risk, this actually provides clients with more flexibility, allowing trades to be made at any point during market hours. This feature also allows for conditional trades that increase client control over pricing, like using stop-limit orders, that aren’t possible with mutual funds.
Another structural benefit of ETFs is their tax efficiency. “Essentially, you have more control over determining when you trigger your capital gains,” said Carson McLean, CFP, founder of Altruist Wealth Management. “They only get triggered upon an actual sale, as opposed to mutual funds that will distribute capital gains on an ongoing basis.”
ETF Foundations
Beyond these inherent advantages, ETFs also tend to have lower costs than mutual funds. This is because of several factors, including a lack of 12b-1 fees, though many mutual funds have done away with these. A University of Iowa study found that about four-fifths of the additional costs come from fees that pay for administration, record keeping, and regulations mandated by federal agencies. Much of the remaining difference in expenses was from the cash drag of holdings.
In addition, ETFs are often more transparent than mutual funds. Many disclose their holdings daily, while mutual funds are only required to report their holdings quarterly. Even then, they have 60 days to do so after each quarter ends.
Tip
In the last decade, ETF fees have come down significantly. In 2015, actively managed ETFs had an average expense ratio of 0.82%, with passive index ETFs averaging 0.25%. In 2024, those figures were 0.44% and 0.14%, respectively.
Addressing Emotional Concerns and Risk Perception
Even after learning that ETFs are no riskier than mutual funds, certain clients may struggle to embrace the idea. It can be hard for some to reconcile that with what they feel when they see the price of ETFs fluctuate minute to minute. As a result, you may need to put some extra time and care into easing their concerns over volatility.
“People used to mutual funds sometimes panic when they see their ETF values move more often,” said Croak. “I explain that the price changing during the day does not make it riskier, it just makes it visible. I remind them that volatility is always there… ETFs just don’t hide it. Once they understand that, the fear usually fades.”
It’s often beneficial to redirect their focus away from short-term price movements toward the long-term. Unless your client is an active trader, they probably shouldn’t be watching ETF tickers anyway. Buy-and-hold investors are typically better off ignoring market noise.
Tactical Applications
It can also help to explain that ETFs may be experiencing a boom, but they’re not a recent invention. “Clients sometimes think ETFs are ‘new’ or ‘unproven.’ But some ETFs are older than Netflix.” Croak said. “The oldest ones have more than 30 years on the market and handle hundreds of billions in trades each day.”
After establishing this, you can use ETFs’ long-term track record to help validate them, such as by comparing their performance to that of an equivalent mutual fund.
Note
Both the mutual fund and ETF versions of Vanguard’s Total Stock Market—VTSAX and VTI—have an average 10-year return of 12.90%. However, VTI has a slightly lower expense ratio at 0.03%, compared with VTSAX’s 0.04%.
Make ETF Education Part of Your Client Conversations
Rather than relying on your newsletter or seminars to educate clients on ETFs, it’s often more effective to broach the topic during your regular points of contact. For example, consider bringing up ETFs during portfolio reviews, at performance check-ins, or when discussing market trends informally.
You can use pivots like the following:
- “Let’s talk about why we’re using this ETF instead of a mutual fund.”
- “Here’s how this ETF helped lower your tax bill this year.”
- “This ETF publishes its holdings daily, so you can always see what you own.”
“When I bring up ETFs, I don’t overcomplicate it,” Croak said. “I just say, ‘Let’s check if your mutual fund is doing more harm than help.’ Then I pull up the ETF equivalent and show the difference in fees or returns. Nine times out of 10, the math handles the rest. People get on board when they see numbers that make sense.”
The key is to make the topic relevant. Instead of discussing ETFs in the abstract, explain how they relate to your client’s portfolio or investment goals.
Client Customization
Using ETFs To Reinforce Your Advisory Value
There can be many great opportunities to use ETFs to show your value to clients. For example, by teaching clients how these funds work, you can demonstrate your expertise and ability to make intimidating topics digestible.
You can then educate them further about ETFs, by bringing up discussions of ETF selection, asset allocation, and rebalancing. Not only do these reinforce your expertise, but they also position you as a trusted advisor driving actionable strategies.
During these conversations, you can also explain why you’re picking certain ETFs for their portfolio. Whether it’s for lower costs, greater transparency, or increased tax efficiency, your recommendations highlight how you’re putting money back in their pocket and making their life easier.
How Do I Position ETFs as Part of a Broader Financial Plan?
You can explain that ETFs are flexible investment vehicles that bundle many assets into a single fund. They work a lot like mutual funds—letting you create diversified exposure across sectors, regions, or asset classes—but with advantages like intraday trading access, increased tax efficiency, and lower average costs.
Should I Only Use Passive ETFs With Clients?
No, you don’t need to limit yourself only to passive ETFs. Active funds may lag the market on average, but skilled managers can sometimes add short-term value through outperformance, especially during periods of uncertainty or volatility.
What Tools Can I Use To Show Clients What’s Inside an ETF?
Third-party platforms, such as Morningstar and ETF.com, can provide detailed insights into individual ETF holdings. Alternatively, you can direct clients to their ETF issuer’s website, whether that’s Vanguard, iShares, or Schwab.
The Bottom Line
ETFs can be a powerful tool for building trust with clients. Take the time to explain how they work, address any emotional concerns, and show why they support your client’s long-term goals. Not only does this demonstrate your expertise, but it also positions you as a valuable advisor they can rely on for strategic guidance.