There are a lot of financial products in the stock market, and one of these is called Exchange Traded Funds or ETFs. For some reasons, ETFs can be likened to mutual funds, but are being traded in the form of stocks. You need to get educated with this type of investment or advised by a trusted finance consultant before coming up with the best strategy to handle them right.
What are ETFS?
Technically, ETFs are a type of fund that owns shares of bonds, stocks, gold bars, oil futures, foreign currency and other underlying assets. These are considered one of the best entries when trying to make an investment portfolio. Most people engage with these products to get a balanced approach in mixing bond and stock funds.
How are ETFs different from mutual funds?
- ETFs are tax efficient compared to regular mutual funds. Tax spending happens when you sell an ETF and when you distribute fund through capital gain. The catch is that an ETF rarely allocates capital funds compared to mutual funds.
- ETFs provide a current and definite view of holdings because reports are done on a daily basis. The transparent updates can help you know more about possible risks, trends and recognize overexposure to some markets.
- ETFs, let you access unique types of investment. You can own shares of precious metals including platinum, palladium, gold, and silver.
- ETFs also allow you to diversify your finance portfolio by letting yo invest according to characteristics, geography and market sectors. You can have shares in real estate, energy and dividend-paying stocks all at the same time.
What are the advantages of Exchange Traded Funds?
There are three main benefits of ETFs which substantially create an impact on the profitability of any investment:
- Tax efficiency – As mentioned earlier, ETFs have a variety of stocks considered to be more efficient compared to index funds. ETFs also allow the investors to trade to significant volumes and receive non-cash payments. If an investor buys shares, then tax is deferred until the stock is sold.
- Diversification – Your investment will not focus on one stock or product alone. ETFs have diversified opportunities allowing you to invest in international shares and specific industries like energy, biotech, and technology.
- Low expense ratio – Exchange Traded Funds cost less, have broad diversification and low turnover. You can be charged up to 10% on mutual fund fees while up to 1.25% on ETF expense.
What are the disadvantages of ETFs?
- International exposure is limited – Although there is a vast range of ETF products to trade in the US market, some countries include large-cap products. A new investor might not be able to access mid and small-sized stocks.
- The intra-day trading scheme may only be perfect for short-term ETF owners and not to long-term traders.
A risk of investment inactivity – Some investments may not be as active as other traded goods due to issues which are regional or sector-related.
Investing in ETFs are rewarding and satisfying if you know how to handle its risks and benefits. Do your research and create an investment plan and strategy to make the most out of your shares.