How High Net Worth Investors Use ETFs to Build Wealth | Twin Oak Insights

For decades, high-net-worth investors (HNWIs)—individuals and family offices whose portfolios exceed $1 million in assets—relied primarily on mutual funds, separately managed accounts, and private investments to achieve their financial goals. But in recent years, exchange-traded funds (ETFs) have become increasingly popular among affluent investors and high net work investors. 

Today’s ETF universe goes far beyond low-cost index tracking; it now includes sophisticated, tax-aware, and actively managed products designed for investors with complex needs. For HNWIs, ETFs combine flexibility, efficiency, diversification, customization, and control. 

Depending on the HNWI’s needs, different ETF types can be suitable, whether the ultimate goal is growth, reduced tax exposure, or risk management.

Why High-Net-Worth Investors Choose ETFs

The appeal of ETFs for wealthy investors often comes down to cost, control, and customization, which are three areas where traditional mutual funds may fall short.

• Cost Efficiency: Even for wealthy investors, cost matters. ETFs typically have lower expense ratios than mutual funds (which can charge upwards of 2% in fees, plus 20% of the profits). For portfolios worth millions, trimming even a fraction of a percent off of fees can translate into tens of thousands of dollars in annual savings.
  
  
• Liquidity and Transparency: Unlike mutual funds, which are priced once daily, ETFs trade intraday on exchanges. This gives investors more flexibility to manage entry and exit points, implement hedging strategies, or rebalance in real time. ETFs also publish their holdings daily, which maximizes transparency into how the assets are being managed.
  
  
• Tax Efficiency: ETFs’ “in-kind” creation and redemption process makes them more tax-efficient than mutual funds, which often distribute capital gains to all shareholders. This is a key reason high-net-worth investors favor ETFs to minimize their annual tax exposure.
  
  
• Diversification Without Complexity: ETFs provide instant access to a wide range of asset classes, from equities and fixed income to commodities and alternatives. For HNWIs, they serve as a foundational investment strategy that promotes diversity and cost-savings, a one-stop-shop for all of the benefits of a holistic investment approach. (Plus, ETFs bypass the hassle of K-1 and other fund documents.)
  
  

Types of ETFs Most Suitable for High-Net-Worth and Family Office Investors

Not all ETFs are created equal. Wealthy investors tend to gravitate toward certain categories that align with their sophisticated objectives.

• Tax-Aware ETFs: These funds are explicitly designed to minimize capital gains distributions. They often use low-turnover and tax-loss harvesting strategies to enhance after-tax returns. At Twin Oak, we seek to leverage tax aware investing to out-perform passive alternatives on an after taxes and after fees basis.
• Actively Managed ETFs: Once limited to passive index tracking, the ETF space now includes actively managed funds across a host of asset classes, from traditional equities to alternative assets, such as cryptocurrency or private market exposure. On top of giving investors access to professional insights while retaining the liquidity and cost efficiency of the ETF structure, these funds also allow for sector-focused or thematic investment strategies, including megatrends like artificial intelligence. 
• Alternative ETFs: As the market matures, more funds now provide access to commodities, hedge fund–like strategies, or private-credit-style exposures while retaining the benefits of the ETF wrapper. For investors accustomed to complex private investments, these ETFs offer customization and versatility with daily liquidity and lower investment minimums.
  
  

How ETFs Help Manage Taxes, Risk, and Diversification

For HNWIs, financial success often depends as much on tax management and risk control as on performance. ETFs are uniquely positioned to support all three pillars of this style of investment strategy. 

Because tax-aware ETFs can be managed to rarely distribute capital gains, they can significantly reduce the annual tax burden compared to mutual funds or actively traded accounts. Because of this, HNWIs are able to defer taxes until they sell shares (which allows gains to compound over time), leverage ETFs within taxable accounts while locating higher-turnover assets in tax-deferred vehicles (such as IRAs), and employ tax-loss harvesting to realize deductible losses while maintaining market exposure. After all, deferred compounding is one of the most powerful forces in investing.  

The foundational structure of ETFs inherently manage risk. They provide instant diversification across hundreds or thousands of securities, helping reduce concentration risk common for HNWIs or family offices who hold large positions in individual stocks, real estate, or private businesses. ETFs can also be customized to mitigate downside risk, or fine-tuned to adjust exposures related to value, momentum, or volatility requirements. 

ETFs also embrace simplicity, even for HNWIs with complex financial goals. A single portfolio is able to simultaneously invest in domestic and international equities; corporate, municipal, or Treasury bonds; alternative assets such as real estate; and thematic, growth-orientated asset classes such as artificial intelligence. 

Are ETFs Right for You?

For multi-million-dollar portfolios, this level of flexibility and simplicity is invaluable, especially when paired with real-time visibility into holdings. Beyond that, HNWIs and family offices can now leverage ETFs as a multifunctional toolkit for building tax-efficient, risk-managed, and globally diversified portfolios. 

A foundational element of any investment portfolio, ETFs provide enhanced liquidity and cost control, while giving wealthy investors a powerful way to stay nimble, protect gains, and grow wealth across generations.

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