If you are trying to find beneficial investment vehicles that will let you diversify, hedge, and expose yourself to certain industries, ETFs might just be the right one for you.
Many investors who include exchange traded funds (ETFs) in their portfolio usually reap the following benefits. Consider them carefully and see if investing in ETFs is for you.
Easy Single Transaction
ETFs typically serve like indices and they can follow certain market sectors. The different between ETFs and indices is that you can buy an ETF with one fast and singe transaction.
You are essentially buying a mini-portfolio and not really a bundle of stocks, unlike indices. This makes it easier for investors to invest when they are targeting a certain price.
At the same time, you get filled on your order quickly. That’s very different from buying a basket where you are tracking each individual stock, which is quite a lot of work.
Efficient Pricing
Since there is only one transaction per trade, the commissions you have to pay on an ETF are usually lower than that of an index, which needs a basket of stocks as well as multiple trades.
On top of that, you also don’t have to pay any load fees. The managing fees are also often lower for ETFs if you compare them to regular mutual funds.
Taxes
For ETFs, capital gains taxes are generally lower when compared to regular, traditional mutual funds because of the structure of each trade.
This is how it works. When you realize a gain in a daily mutual fund trade or with an index trade, you incur capital gains taxes immediately.
For exchange traded funds, the individual gains taxes are not realized until the asset are sold with the whole fund. In other words, an ETF is a very tax friendly investment.
Derivatives
Many ETFs can also be traded using derivatives such as options, futures, and swaps. These derivatives are very useful tools that will help you manage the risks in your portfolio.
So, whether you want to hedge your ETFs with calls and puts or trade ETFs while taking advantage of its volatility using options strategies, many ETFs will provide that kind of flexibility.
It’s also worth remembering that some derivatives are inside the fund. That means you first have to learn about their real impact on your trading strategy and the risks involved.
Passive Management
ETFs are designed to follow a specific index or benchmark. As such, they are not really expected to outperform the benchmark.
That means the ETF needs only minor adjustments when compared to an aggressively managed fund, which is designed to look for a higher return than the underlying asset.
Simplicity
ETFs are simple and they should be easy to understand. So, if you want to invest in a certain industry or you want to mimic the returns of a particular industry or underlying asset, you are almost always one click away from starting to invest in ETFs.
