This type of investor focus would require purchasing individual stocks to meet that criteria. On the other hand, a semiconductor ETF like the VanEck Vectors Semiconductor ETF (SMH) will give the investor the exposure he or she is seeking.

3. Possibly Lower Costs

Because an ETF can track an index, it can be passively-managed. This translates to lower costs to investors when compared to mutual funds, which are typically actively-managed.

Actively-managed mutual funds carry greater operating costs because they have to pay analysts and other research specialists. The lower costs of ETFs show in their expense ratio, which is the cost to run the fund.

Since stocks themselves don’t represent shares of a fund, there are not expense ratios attached to them. If an investor is building a portfolio of a sector with stocks, the costs can add up in broker fees.

ETFs, on the other hand, can allow an investor to gain exposure to a specific sector with one purchase as opposed to buying individual stocks.

4. Inverse and Leveraged Options

If an investor is betting that a specific sector or stock will go down, he or she will have to short that stock or group of stocks. Furthermore, shorting stocks are typically bought on margin, meaning the investor will have to borrow the money from the broker–known as leverage.

With an inverse ETF, an investor can be bearish without having to buy the securities on margin. If an investor does wish to leverage a trade, there are leveraged ETFs available that allow investors to amplify their returns by multiples of two or three, depending on the ETF product.

5. Access to Other Asset Classes

An investor who wishes to invest in fixed income must purchase bonds. If an investor wants to allocate capital into physical gold, he or she must buy the precious metal and store it.

An ETF can allow an investors to access the bond market without actually purchasing the debt and the commodities market without purchasing actual gold. This is because an ETF is a type of security that tracks an index, bonds, commodities, currencies, or a mix of various asset classes.

For more educational information on ETFs, click here for Education Central.