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.
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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
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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.
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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.
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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.
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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!