Exchange traded funds (ETFs) are the latest investment tool to really capture the curiosity of Wall Street. Some estimates say that there are a few thousand ETFs available for investors today. That doesn’t mean, however, that they’re perfect.
Andrew Chan for Boston.com reports that there are many advantages to using ETFs versus mutual funds:
- ETFs trade like stocks. Therefore, they can be bought and sold throughout the trading day as the price fluctuates and can be bought on margin, sold short, or traded using stop orders and limit orders. [ETF Strategies: Something for Everyone.]
- ETFs do not have to hold cash or buy and sell securities to pay fund investors when a redemption is requested.
- ETFs are less expensive to own and trade
- ETFs have lower annual taxable distributions compared to mutual funds. [6 Mistakes ETF Investors Should Avoid.]
- ETFs are more diverse, allowing access to niche markets and corners of the market that were hard to reach, such as currencies.
Disadvantages of ETFs:
- Some niche ETFs may actually cost more to own, with higher cost and risk. Thinly traded funds are hard to trade and may be subject to volatility.
- Some ETFs are simply not as easy to understand as others; leveraged ETFs and futures-based commodity ETFs are two key examples.
As you can see, the advantages that ETFs bring to the table far outweigh the aspects of them that you should be a little more cautious about.
Tisha Guerrero 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.