If you’re like many investors in 2009, you’ve realized the benefits of exchange traded funds (ETFs). Whether you’re just starting out with them or are some ways along in your education, a refresher course doesn’t hurt.ETFs are a great way to help you reach your investment goals. Most ETFs are simply a basket of stocks, like a mutual fund. The difference is that ETFs can trade throughout the day, like a single stock, with the ease and transparency you’d expect from a share.
Among the many advantages of ETFs:
- No mysteries. You always know what you’re buying, because they replicate indexes. The holdings of those indexes are easily available and posted daily.
- Low expense ratios. Who doesn’t like to save money? The less you pay in expense ratios, the more you get to keep. Many ETFs cost a lot less than mutual funds, however, keep in mind that ETFs trade in brokerage firms and can rack up commission costs.
- Diversification. ETFs come in handy when investors want to create a diversified portfolio. There are hundreds of ETFs available, and they cover every major index (those issued by Dow Jones, S&P, Nasdaq) and sector of the equities market (large-caps, small-caps, growth, value). There are international ETFs, regional ETFs (Europe, Pacific Rim, emerging markets) and country-specific (Japan, Australia, United Kingdom) ETFs. Also, ETFs cover specialty asset classes and fixed income. [How to research what is in your ETF.]
- Tax Efficiency. ETFs are more tax efficient than mutual funds, largely because of their low turnover. The unique structure of ETFs enables investors trading large volumes (generally institutional investors) to get in-kind redemptions. This means that an investor trading large volumes of ETFs can redeem them for the shares of stocks that the ETFs track. This arrangement minimizes tax implications for the investor exchanging the ETFs since the investor can defer most taxes until the investment is sold. [More reasons ETFs are better.]
If you want to get started on your ETF research, take a minute to look at our ETF Analyzer. From there, you can sort ETFs by name, performance or relationship to the 200-day and 50-day moving average. You can also view charting and pricing for any fund on our quote pages.
For more information about strategies, using ETFs and trend following, check out The ETF Trend Following Playbook.
For more stories about ETFs, visit our ETF 101 category.
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.