The rising popularity of exchange traded funds has some investors wondering if they should make the switch from their traditional mutual funds. Index funds have been a staple in plenty of portfolios but ETFs are offering up plenty of reasons to consider a change.
One of the biggest reasons investors are interested in making a switch from mutual funds to ETFs is the cost factor. ETFs sport lower expense ratios than mutual funds, and now with free ETF trades offered at many brokerages, dollar-cost averaging investors are in luck. However, cost is not the only basis to make a decision on, explains Christine Benz for Morningstar.[Love ETFs? Then Learn More About Them, Too]
A few other factors to weigh in on:
- Tax Efficiency: ETFs offer a few tax breaks that mutual funds do not. Mutual funds dole out capital gains whenever there is a redemption, but ETFs do not. Mutual fund managers must sell shares to raise cash.
- Options and intraday trading: ETFs offer plenty of trading flexibility because they trade througout the day, with the ease of single stock. Holdings are transparent so decisions can be made in real time. ETFs can give the investor more control. Just be sure to keep track of trades, as fees can rack up on those that do not offer free trades.
- Starting out small: First-time investors and those beginning with a small amount of capital can benefit from an ETF. There are no minimum initial investment fees, and the commission-free trade offers another plus, because it preserves the principle. [Switching from Mutual Funds to ETFs: Having the Talk with Clients]
- Wide market exposure: ETFs also offer individual investors exposure to currencies and commodities. There are also niche sectors that can be accessed through ETFs.
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.