Change Your Style By Driving An ETF [iShares Core S&P Mid Cap ETF, iShares S&P SmallCap 600 Index (ETF)]

etfsHave you ever tried to take advantage of that great rental car deal for an exciting sports coupe? You typically find that the “great deal” vanishes quickly after things like fuel surcharges, airport “convenience” fees, mileage and taxes take their toll. You also find that rally stripes on the hood and fancy wheels only soften the disappointment of a mediocre engine that likely matches your own family wagon. You would have been better off taking the trusty sedan to get to your vacation spots.

Fund investing can be much the same way. Hidden costs can potentially make a big impact on your final return, particularly over the long-term. These costs don’t just come in the form of management fees, but in other critical areas such as index-tracking underperformance and tax inefficiency.

Over time, ignoring these costs can mean leaving a lot of money on the table. Instead of overpaying for underperformance, as some investors may have experienced in the last few years, investors should look for a cost efficient manner to seek their returns. And some exchange traded funds (ETFs) have proved to perform better than the average active mutual fund.

Time to change your style?

Many investors are familiar with the “style box” investment model, which traditionally groups a diversified blend of actively managed mutual funds to help investors reach their goals.

But in today’s changing marketplace, portfolio construction is moving beyond active-only models, as investors increasingly look to low-cost ETFs that track broad indexes. Today, we believe investors can get more value by combining ETFs for their long-term holdings with well-managed mutual funds for the markets, sectors and objectives you and your financial advisors have strong convictions in.

ETFs for core performance

These days, ETFs are not just about low cost and transparency. They can also outperform comparable mutual funds. In fact, on average, iShares S&P style box funds outperformed 90% of their active peers over the past five years.1 And they’ve done this at roughly one-third the cost of typical mutual funds2 and are tax efficient.

These ETFs are designed and managed by BlackRock to fit well within the style box. For example, the iShares Core S&P 500 (NYSEARCA:IVV) contains the top large-cap U.S. stocks. Similarly, iShares Core S&P Mid-Cap (NYSEARCA:IJH) and iShares Core S&P Small-Cap (NYSEARCA:IJR) funds track mid- and small-cap American companies.

Get the active you pay for

You should think of your active investments in similar terms: Am I getting what I’m paying for? In other words, seek from your active funds what index funds can’t offer, such as specific market outperformance or goals-based objectives like income. Regularly examine these investments to be sure they provide value for their cost.

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