Since the first exchange traded fund was introduced in 1993, the industry has grown at a rapid pace. Assets under management in the business have surpassed the $1.4 trillion mark due to the popularity of the tools and the various investment strategies they allow investors to use.
“The ETF’s stock-like quality allows the active investor to do more than simply trade intraday. Unlike mutual funds, ETFs can also be used for speculative trading strategies, such as short selling and trading on margin. In short, the ETF allows investors to trade the entire market as though it were one single stock,” Investopedia staff wrote.
The investing strategies that are available to ETF investors are numerous, due to the flexibility of tools. David Fabian of Fabian Capital Management on InvestorPlace explains some of the most beneficial ways to use ETFs for portfolio enhancement.
Investors can use a limit order and set stop losses with an ETF to help protect a portfolio from price swings and market volatility. An investor can set a downside price target using a limit order and if the market comes down to that point your transaction will automatically be filled. Plus, a stop loss in a position also helps retain capital amid a sell-off. This flexibility is character of an ETF, since a mutual fund only gets priced at the end of the day. [Special Report: Alternative ETFs]
The size of the ETF industry has led to the creation of an ETF from every sector, country, currency and corner of the market imaginable. This allows investors to create personalized portfolios with core holdings and satellite funds for targeted asset allocation. The transparency of an ETF makes correct asset allocation easy since the construction of the underlying index the fund is tracking is always disclosed. [How Investors Are Using ETFs]
ETFs also tout lower fees compared to actively managed mutual funds. The lower the fee of an investment, the more capital there is left to preserve. More and more sponsors are lowering fees, and some offer free trades for in-house brokerages. But buyer beware, low fees do not mean the best possible product. A low fee should not be the deciding factor in selecting an ETF. [Cost Matters with ETFs: Vanguard Report]
The overall liquidity of an ETF is important because this allows investors to access their money at any time, in real time. There are no restrictions on trading, short-term redemption fees, back end sales loads, redemption windows, or other roadblock that will prevent you from making a withdrawal from an ETF, reports Fabian. A small trading commission applies to selling, however, no other fund allows an investor such easy access to their own capital. [How ETFs Have Helped the Average Investor]
Tisha Guerrero contributed to this article.