An exchange-traded fund, or ETF, is a fund that can be traded on an exchange like a stock, meaning it can be bought and sold throughout the day.
For nearly a century, traditional mutual funds have offered many advantages over building a portfolio one security at a time. Mutual funds provide investors broad diversification, professional management, relative low cost, and daily liquidity.
Exchange-traded funds (ETFs) take the benefits of mutual fund investing to the next level. ETFs can offer lower operating costs than traditional open-end funds, flexible trading, greater transparency, and better tax efficiency in taxable accounts.
ETFs are bought and sold during the day when the markets are open. The pricing of ETF shares is continuous during normal exchange hours. Share prices vary throughout the day, based mainly on the changing intraday value of the underlying assets in the fund. ETF investors know within moments how much they paid to buy shares and how much they received after selling.
Reasons to invest in ETFs
ETFs are unique in several ways which make them a lucrative investment option. Here are eight reasons to invest in ETFs:
1. ETFs offer liquidity
Apart from gaining wide diversification in their mutual fund portfolio, ETF owners are also blessed with liquidity. Since they are open ended funds, there is no lock-in involved. This gives ETF holders a privilege to withdraw their holdings as per their requirement.
2. ETFs are cost efficient
Since these aren’t actively managed like most mutual funds, the expense ratio for owning an ETF is comparatively lower. When there are no management fees or commissions involved, this might increase the incremental value of the overall fund. Owning an exchange traded fund with a low expense ratio can add on to your payouts when held on to for the long run.
3. ETFs offer flexibility
Like mentioned earlier, ETFs unlike, mutual funds, can be purchased/sold at the stock exchanges. These funds can be traded on a daily basis, just like intraday trading. These can be brought short and sold at a profitable margin, and all of this can be done just within a day during market hours.
4. ETFs diversify your portfolio
ETFs can introduce investors to completely different market segments. For example, if one wishes, they can invest in Gold ETFs, which generally track the price of physical gold as its benchmark. This allows investors to buy a commodity like gold in the form of gold ETFs. Having ETF as part of your mutual fund portfolio can actually help you in diversifying your investments.
5. ETFs are single transactions
When you purchase a mutual fund, you purchase a basket of stocks consisting of small shares across assets. But you can purchase an ETF with just one single transaction which is equivalent to owning a mini portfolio. This helps investors when they are tracking the performance, for example, if you invested in gold ETF, you need to track the performance of gold as a commodity daily, and this makes things a lot easier for the investor.
6. ETFs do not have a lock-in period
As ETFs can be traded on a daily basis, these funds do not hold any maturity period. This not only offers liquidity but liberalizes the investor with an opportunity to sell their holdings as per their convenience. There is no holding period making ETFs an interesting investment option.
7. Tax efficiency
ETFs are treated just like equity oriented schemes, and hence they are taxed just like any other equity related investment scheme.
8. Passive fund management
This means that investors needn’t keep track of every single investment their ETF owns in. The fund manager ensures that the portfolio resembles the benchmark index with minimal tracking error.
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