Here are Some Reasons to Invest in ETFs
An Exchange Traded Fund is basically a fund that has underlying assets. The underlying assets are multiple and may include shares of bonds, foreign currency, minerals, and shares of stocks.
So What Are The Benefits Of Trading ETFs?
An ETF owns these assets collectively and divides ownership of these assets in the form of shares. However, direct ownership is by the company, corporation or brokerage firm that is managing them. Shareholders only own these assets indirectly.
To better understand Exchange Traded Funds, we can try to view them in the light of mutual funds while noting the structural differences between the ETFs and mutual funds.
In a sense, ETFs are built like mutual funds. The only difference between the two is that they trade on the stock market as individual stocks. Another difference is collectivity of assets. Also, Exchange Traded Funds experience price changes throughout the day.
They are comparatively cheaper than mutual funds in terms of fees. They are more liquid if you were to measure their liquidity in a day thus making them an attractive investment for individual investors.
They Provide Investment Diversification
Diversification of investments is becoming ever more crucial to investors. If you are thinking of diversifying your investment, you should consider ETFs. This is because they spread out risk. One fund could consist of thousands of individual stocks and bonds. Thus the loss in one asset could be offset by the gains in another asset.
One fund could represent various market segments. This implies that you could be investing in minerals like gold while at the same time investing in foreign exchange or in the transport industry. Apart from these, you may also be in multiple countries. Thus you can reap the benefits of all these market segments at once with ETFs.
It is noteworthy to know that ETFs nowadays represent every major asset class, commodity and even currency in the world
One of the advantages of ETFs is that they are managed by highly trained professionals. This is an incentive to investors. It removes uncertainty on how your capital is being invested. Thus, you can just sit back and let them do what they do best.
By virtue of their professional management, you will receive regular notifications and monthly statements of how your investment is progressing.
All managed funds incur operating expenses. The expenses include administrative expenses, marketing costs, distribution costs, portfolio management expenses and other costs that the management may decide.
With ETFs, some of these expenses are passed on to the brokerage firm on client-service basis. Therefore, it reduces the cost burden to the customer.
In addition, the brokerage firms charge minimally for services such as monthly statements, transfers, and notifications.
Redemption fees are also absent in the case of ETFs.
Thus, the total fees that a client is supposed to pay is way lower compared to other managed funds. This provides an incentive to investors since any rational investor out there takes to heart the notion of paying less in order to earn more.
Exchange Traded Funds provide the opportunity for investors to take part in a diversified investment with less capital.
Flexibility in Trading
ETFs are generally flexible in terms of trading. This is because they are bought and sold during the day when the markets are open. Their pricing is continuous and the prices of shares vary throughout the day.
Thus, an investor is able to know in real time how much they paid to buy shares and how much they received from the sale of shares.
This real-time feedback enables an investor to easily move capital between various asset classes such as bonds, stocks or even commodities.
They Trade As One Individual Stock
ETFs enable investors to trade in the whole stock market as if it were just one stock. Thus, you are able to purchase them on margin and sell them short, just like individual stocks.
You are also able to trade them at a price which is constantly updated during the course of the day just like individual stocks.
As far as taxation is concerned, all managed funds have to pay capital gains tax. However, in the case of ETFs, the total tax payable is way lower than other managed funds like the mutual funds.
The tax advantage is as a result of structural differentiation of ETFs. Mutual funds, for example, accrue more capital gains tax because of frequent trading and also pass on the burden of tax to the investor through the whole period of investment.
This burden of tax is distributed to shareholders with respect to the proportion of investment. The capital gains tax is payable even if the overall fund went down in value. In contrast, Exchange Traded Funds accrue capital gains tax only upon the sale of the ETF by the individual investor.
Thus, this provides a huge incentive in terms of tax savings for those who choose to trade with them.
Better Risk Management
In the world of investments, risks are inevitable. In actual sense, you cannot fail to mention risk while talking about investment. Every investor seeks to minimize risk while maximizing on profit.
Thus, with that in mind, ETFs provide better risk management as opposed to other managed funds. It does so through portfolio diversification. It also manages risks better by providing you, as an investor, the opportunity to spread risk that arises from a particular market segment or industry by acquiring ETFs that short an industry.
The act of shorting an industry is basically selling a security that you do not own or that of which you have borrowed. This is done when you have reason to believe that the security’s price will fall and thus enabling you to buy it back at a lower price hence making a profit.