The Benefits Of Exchange Traded Funds (ETFs)
Author: Ted Brumby
Exchange Traded Funds are designed to hold assets such as stocks or bonds, and generally trade at the net asset value of their underlying assets. Like index tracking pooled funds, Exchange Traded Funds are designed to track a chosen market index. However, ETFs tend to have a lower expense ratio than index funds. The easiest way to think of ETFs is that they are akin to mutual funds that trade like stocks.
There are a number of benefits to investing in Exchange Traded Funds. ETFs are liquid, meaning that their market price is unlikely to be affected by high or low demand. In fact, market processes insure that the fund value and price of ETFs represent only the prices of the shares it holds. If the demand for a particular ETF should rise, the United States creates new baskets of securities in response. If the demand should fall, the reverse occurs.
Because Exchange Traded Funds reflect index performance, investors know what they are investing in. Quality ETF sharing institutions regularly disclose their holdings, so investors are able to clearly evaluate their investment portfolios and plan for the future.
Exchange Traded Funds provide diversification with less risk by allowing investors to make targeted investments in chosen areas. This less risky diversification is possible because ETFs provide broader exposure to entire markets, rather than concentrating investments in a small number of individual companies.
Exchange Traded Funds are useful in speculative trading strategies, such as trading on margin or short selling. Like traditional stocks and bonds that can be traded intra-day, ETFs allow investors to speculate on the direction of short-term market movements. If investors notice a rise in the price of an index, they can purchase ETFs that mirror the index, hold the funds while prices continue to climb, then sell them for a profit before the end of the trading day. Exchange Traded Funds allow investors to take advantage of the daily fluctuations of its basket of securities, trading the entire stock market as though it were a single stock.
As previously mentioned, Exchange Traded Funds generally have a lower expense ratio than most actively managed equity funds and even some equity index funds. ETFs are more cost-effective, both when making an initial investment, and because they provide diversification comparable to the exposure gained by investing in individual shares. However, investing in Exchange Traded Funds allows the consumer to avoid the trading costs involved in the numerous transactions of buying a large number of individual shares.
About the Author:
Exchange Traded Funds are flexible, allowing individual investors, as well as institutions, to utilize them in a broad range of investment strategies. Investors buy and sell ETFs like shares, and trade them through investment advisors, internet trading accounts, and brokerages.