What are ETFs? — Six Reasons to Use Them

November 13th at 7:45am by Tom Lydon

Exchange traded funds have provided the average retail investor, advisors and institutions with the opportunity to efficiently and cheaply access many different asset classes and sectors in one easy-to-use investment vehicle.

In a recent webcast by Street One Financial and FA Magazine, some redeeming qualities of the ETF trading vehicle were highlighted. [What is an ETF? — Part 1: The Basics]

  • Tax Efficiency. The tax structure of the ETF is more efficient than the mutual fund, with the exception of certain asset classes, such as commodities or currencies. Additionally, ETFs have historically come with limited or no capital gains distributions.
  • Access to Institutional Strategies. For instance, the fund products cover volatility, commodities, currencies, cross asset class hedges, equity, fixed income, active management, market capitalization, among others.
  • Low Fees. The ETF industry comes with an average expense ratio ranging from 0.1% to 0.7%, with the lowest coming in at 0.04%, whereas the mutual fund industry’s average expense ratio is 1.43%.
  • Intraday Transparency. ETFs track an underlying basket of securities. Trading desks and ETF sponsors provide data on where the ETF should be valued throughout the trading day while mutual funds issue their 4PM NAV.
  • Trading Flexibility. ETFs trade like stocks, and as such, investors can place limit orders, stop limit orders for more complex trading strategies. Consequently, technical analysis and charting can be used with the ETF product.
  • Options. Investors can also write calls or puts to generate premium income or take protective hedges, along with other options strategies.

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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