One of the newer features of trading is the Exchange Traded Funds, or ETF’s, has become an in-demand item in the trading world. Introduced in 1993, ETF’s have rapidly grown and are a definite favorite among some traders. ETF’s are very similar to mutual funds in that they provide an automatic diversification, but also offer you greater flexibility in your trade options. Here are some ways that trading with ETF’s could benefit you.
ETF’s Offer Greater Flexibility than Mutual Funds
One great advantage of an ETF is that it gives you a greater degree of flexibility than a mutual fund does. With a mutual fund, the prices remain the same throughout the day and cannot easily be traded. An ETF, however, gives you a great degree of trading power because:
o It can be traded any time of day
o Its value changes throughout the day like any stock
o It can be bought and sold like a stock
This allows you to have options to make quick profits like you can with the stock market. You can buy and sell it like a stock if you think a particular market sector is going to do well on a particular day.
ETF’s Provide Automatic Diversification
Buying ETF’s give you an automatic diversification. They are like mutual funds in that it covers a group of stocks and other types of investment – depending on what you buy. If you think that a particular sector will do well at a certain time or period of time, then you can buy into that sector with an ETF that covers it. This provides you with a greater margin of safety because, although all of the different stocks may not perform well, the sector as a whole will.
ETF’s Have Lower Costs
ETF’s do have costs on each trade that you make. This means that it could be rather costly to continuously trade them like you might do with some stock. The overall cost for maintenance fees, however, is lower than that of a mutual fund, and could be lower than buying and selling other forms of investments, depending on how you go about it.
An exchange-traded fund is also great on taxes, too. They offer you lower taxes than other forms, including index funds, and allow you to trade your ETF for the stock that the ETF represents. This reduces your taxes and enables you to not need to pay taxes until they are sold.
ETF’s Provide A Wide Variety
ETF’s now provide you with a large variety of options. Initially, the ETF’s only dealt with the stock market, but now it has expanded to include the bond market. You can also specify types of stock that you would like, such as large or small caps, or you can choose according to industry – like energy, technology, gold, and more. If you want to go country specific, such as Japan, or Germany, the UK, or others, you can also go that route, too.
Other options include the various Stock markets and enable you to get the broad benefits of the market as a whole. You can get ETF’s for the S&P 500, called SPDRs, or the NASDAQ, called QQQQ, Diamonds (DIA) for the Dow Jones, and more. By buying ETF’s this way, you do not lose out if a particular sector goes bad, because you have the whole stock market to balance out your potential losses.
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