Young people have a great ability to spot what they believe are very useful products and are often eager to begin using them.

This became quite apparent while explaining the merits of exchange-traded funds (ETFs) during my annual spring session for Junior Achievement, a program that teaches grade 7 and 8 students the basics of investing.

Canadian adults, however, have been comparatively very slow to adopt ETFs. For example, the ETF market in the U.S. totals approximately 16.5% of the mutual fund market whereas in Canada it is only 6%.

We believe there are two reasons for this. First, investors for the most part cannot purchase an ETF through their bank branch, which is where most of the mutual funds in Canada are sold.

Second, advisors are not compensated to sell ETFs since the majority of such funds charge very low management fees and do not have any sales charges or trailers.

That said, institutional investors are active users of ETFs and so should your investment advisor be. Here are five reasons why.

Effective international investing

Research has shown that it is difficult to outperform passive strategies, especially in large markets such as the U.S. because the greater the liquidity and number of market participants, the more the efficient a market becomes.

If your advisor is picking stocks in those markets or allocating to mutual fund managers who are, ask them how they expect to beat the market. Specifically, what resources do they have at their disposal to give them that competitive advantage?

Overall, we find it’s much more effective to simply invest passively in international markets rather than spend countless hours screening thousands of stocks and hundreds of mutual fund managers.

Makes a lot of sense for bond allocations

Selecting individual segregated bonds for your portfolio can be quite a challenge in the current low interest rate environment. If your advisor is doing it for you, ensure that they are not taking a large spread on your purchase and, more importantly, ask what kind of interest rate risk the bond has.

Bond mutual fund fees can also take a real bite out of performance.

There are some excellent low-cost ETFs that offer reasonable yields and do a good job of minimizing the duration of the portfolio, meaning reduced exposure to rising interest rates.

There are a few specialized bond managers that do a good job, but on the whole it makes a lot of sense for your advisor to utilize bond ETFs.

Can be used to hedge

The benefit of a growing ETF market is that there are more products available for your advisor to use to manage the risk in your portfolio.

For example, some recently introduced ETFs focus on stocks with low average volatility. In our energy hedge fund, we have traded some of the commodity ETFs to hedge our long or short position in companies that have the same underlying commodity exposure.

Many larger ETFs also trade on option markets. As an institutional investor, we make use of what we call an option overlay on a portion of our ETF exposure, allowing us to use many different strategies, from absolute return generation to risk protection.

ETFs have annual management fees averaging 0.1% to 0.75%, compared to 1.5% to 3.5% for mutual funds. This is one reason why a lot of active mutual fund managers have a difficult time outperforming their passive benchmarks.

Martin Pelletier, CFA, is a portfolio manager at Calgary-based TriVest Wealth Counsel Ltd.