What exactly is an ETF?
An ETF is an Exchange Traded Fund, a grouping of securities that are traded on the stock exchange, like normal shares of stock in a singular company are. Most ETFs track an index such as the S&P 500 or Eurostoxx 50 for example.
Why should you invest in ETFs?
1. Low Fees
The expense ratio on most ETFs is about 0.01-0.25%, meaning that for every $1,000 you invest you will only pay $0.10-$0.50 in fees. ETF fees are some of the lowest out of mainstream investment products and save investors a lot of money in the long term
2. Transparency
ETF fund managers publish the lists of holdings daily, making ETFs a more transparent investment option. Mutual funds only publish their holdings quarterly and sometimes even with a 30 day lag. With an ETF the investor knows exactly what their investment entails and can keep the ETF manager accountable.
3. Tax Advantage
In mutual funds when a shareholder cashes out, the fund has to sell securities to fund the liquidation. This is a taxable event, with a capital gain or loss. . Even when a mutual fund drops in value during the year, shareholders still have a tax liability. On the other hand, the structure of ETFs allow shares to be created and liquidated without selling securities preventing an additional capital gain/loss.
4. Time Efficient
Most investors don’t have the time or the knowledge to stock pick and track each position. With ETFs you can invest in a category or index that sparks your interest, prescreened and determined by professionals. No matter your level of risk aversion or personal interests there is an ETF for you.
5. Diversification
With just one investment you are getting exposure to a basket of products ranging from stocks and bonds to commodities and currencies. With each share of an ETF you get exposure to a large grouping thereby increasing diversification effortlessly. The world is at your fingertips when utilizing ETFs as an investment tool!
