Getting back into the market is nerve-wracking enough, let alone picking the stocks that you think are winners; by using exchange traded funds (ETFs) you can take the guesswork out and mitigate some of your risk.

If you are thinking about getting back into the market but do not want to play a guessing game, a low-cost indexing approach may be the answer for your portfolio. Index funds take the guesswork out of investing by tracking the performance of an entire market sector, says Barbara Drury for the Sydney Morning Herald. The cost is much lower than paying a manager to pick the stocks for you in a traditional mutual fund, giving the ETF another plus.

There are two types of index fund: listed exchange-traded funds (ETFs) and unlisted index funds, and there are about 800 or so in the United States. ETFs can also be used as a tactical tool as they allow investors to trade them throughout the day just as you would a single stock. ETFs also have good tax advantages where earnings are given untaxed to investors.

Meanwhile, ETFs are garnering much more interest, not just because of their advantages, but because of the recent sale of the iShares family of ETFs of Barclays. This also represents a shift within the financial industry, as market trends are at a pivotal point of change, explains Nick Rice of the Financial Times. The two trends are:

  • Banks are selling off non-core divisions such as asset managers to raise capital – even iShares, which is the world’s largest provider of exchange traded funds.
  • Second, private equity groups are circling financial services assets and buying into them on select occasions.

The private equity interest in iShares has been much more intense, with CVC Capital Partners eventually coming out on top. This is a measure of how attractive the ETF industry is in the short-term; the fact that  private equity contenders hired experts to help them bid for iShares is a perfect example of how popular the ETF industry is becoming.

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.