What is an 'ETF Wrap'

An ETF wrap is a type of special investment portfolio in which an investor, with or without the aid of an investment advisor, invests solely in exchange-traded funds (ETFs). The composition of each ETF class is initially based on a pre-selected asset allocation model and will periodically need to be rebalanced in response to changes in market values.

BREAKING DOWN 'ETF Wrap'

Common asset allocation models for ETF wrap fee programs are 100% equity, 100% fixed income or a balanced model, which contains both fixed income and equity. The choice of model depends on an investor's age, tolerance to risk, income, goals and other personal factors. Investors can choose to manage an ETF wrap themselves in a non-discretionary account or elect to have a professional do so on their behalf in a discretionary account

The Securities and Exchange Commission (SEC) defines a wrap fee program as one “under which any client is charged a specified fee or fees not based directly upon transactions in a client's account for investment advisory services (which may include portfolio management or advice concerning the selection of other investment advisers) and execution of client transactions.”

Simplicity is one of the primary benefits of a wrap fee program. Clients pay an annual or quarterly fee for wrap products that manage a portfolio of investments, rather than paying individual commissions for trades. For advisers who charge fees based on assets under management, these money management charges for wrap products often are additional — either billed to the client separately or through a higher adviser AUM fee to cover them.

ETF wraps are beneficial due to their low expense ratios when compared to mutual fund wraps. In addition, discretionary wrap programs may offer investors asset allocation and rebalancing services to keep their portfolio in line with their investment goals. One additional benefit of mutual fund wrap programs – access to fund managers typically not available to retail investors – is less applicable to ETFs, which are more widely available direct from the ETF sponsor.  

Limitations of Discretionary ETF Wrap Programs

Wrap fee programs involving both mutual funds and ETFs are an ongoing focus of the SEC. Wrap programs are expected to protect clients from superfluous account activity, or churning. But the opposite problem can occur if there's little trading in the account as the financial advisor is not providing value for the wrap fee being charged. In other words, buy and hold investors and those that trade infrequently are exposing themselves to unnecessary fees by electing for a wrap program over paying commissions for each trade.

Advisors employing ETF and mutual fund wrap programs have also been scrutinized for charging high fees as well failing to adequately disclose the brokerage commissions they pay to trade investments within wrap programs. In some cases, the SEC has found that wrap fees inclusive of brokerage commissions were much higher than the commission costs borne by the advisor.

RELATED TERMS
  1. 10-K Wrap

    A 10-K wrap is a summary report of a company's annual performance ...
  2. ETF of ETFs

    An ETF of ETFs is an exchange-traded fund (ETF) that tracks other ...
  3. International ETF

    An international exchange traded fund (ETF) is any ETF that invests ...
  4. Dividend ETF

    A dividend ETF is an exchange-traded fund designed to invest ...
  5. Stock Exchange-Traded Fund (ETF)

    A stock exchange-traded fund (ETF) is a security that tracks ...
  6. Commission

    A commission is a service charge assessed by a broker or investment ...
Related Articles
  1. Investing

    Wrap It Up: Terms and Benefits of Managed Money

    Read here to find out if you should have your money managed by professionals.
  2. Investing

    That's a (Mutual Fund) Wrap!

    Wrap mutual funds offer professional supervision and other tools for a diversified portfolio.
  3. Investing

    ETF Investing (SPY): Main Attractions

    As the popularity of ETFs soar, here's a look at the main benefits of these investment vehicles.
  4. Investing

    The right time to change from mutual funds to ETFs

    Find out how to determine when it's the right time for you to switch from mutual funds to ETFs, including the benefits of ETFs and who they are best for.
  5. Investing

    11 ETF Flaws You Shouldn't Overlook

    Despite their popularity, exchange-traded funds, or ETFs, have some drawbacks that investors should know about.
  6. Investing

    For More And More Investors, ETFs Are A Godsend

    Average and cautious investors can experience lower risk with ETFs - a safer alternative to swaps and derivatives.
  7. Personal Finance

    Why Investors Need Advisors Who Are Fiduciaries

    Investors need fiduciary advisors to look out for their best interest and keep fees low.
  8. Investing

    Advantages and Disadvantages of ETFs

    You've probably heard that ETFs are better than mutual funds, but you need to consider all aspects before investing. Learn them here.
RELATED FAQS
  1. Can I make money advertising on my car, or is it a scam?

    Are car wrap advertising companies legitimate? Some companies are scams, but some car wrap companies offer legitimate ways ... Read Answer >>
Trading Center