Before jumping into any financial products, investors need to understand how they work as well as the advantages and disadvantages. Although they appear simple, ETFs can be tricky because they combine features of mutual funds and individual stocks.
Therefore, investors need to understand the basics of both mutual-fund investing and stock trading.
“The reasons for the popularity of ETFs are easy to understand. The associated costs are low, and the portfolios are flexible and tax efficient. The push for expanding the universe of ETFs comes, for the most part, from professional investors and active traders. Nevertheless, long-term investors will find that the broad-market based ETFs can find a place in their portfolios when they have an opportunity for occasional large-size purchases of securities,” Investopedia wrote in a recent article.
Jon Palfrey and Karey Irwin, of Leith Wheeler Investment Counsel, reported in a recent piece for The Vancouver Sun that one of the major pros of ETFs is the ability to trade throughout the day similar to a single stock. The ease of trading a basket of shares in real time, seamlessly, is useful for traders and investors. [ETF Growth Creates Need for More Education]
A few more advantages ETFs:
- ETFs are known for their transparency. The holdings in an ETF are available in real time, any time. Unlike traditional mutual funds that trade only at the close of the day, the flexibility of an ETF sets it apart. [What’s Driving the ETF Boom?]
- ETFs are more tax efficient than mutual funds. Overall, an ETF does not distribute capital gains to all shareholders, a high point in tax treatment.
- ETFs offer more products that cover niche areas and corners of the stock market. Sectors such as currencies, commodities and leveraged funds can be easily accessed with an ETF, and at a lower price. Plus, the purchase and trade is a one shot deal, for example, there is no physical delivery needed with a precious metals ETF.[ETFs VS. Index Funds]
- ETFs can provide superior risk-adjusted returns. Since an ETF holds several stocks, rather than investing in just one company, the risk is mitigated when an investor is seeking out a sensitive sector, such as biotech or alternative energy. Since the industries are relatively new, the failure of one company wont blow the entire investment.
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.