It’s been more than 15 years since Exchange Traded Funds (ETFs) began trading and, in recent years, they have become much more popular and are actually gaining against some other, more mature mutual funds. The reasons for that gain in popularity are explained below. Enjoy.
ETFs typically have Low Costs. Some of the best ETF’s, especially compared with traditional mutual funds, have very low fees. At tax time ETF’s are also excellent because there’s no need to constantly buy and sell stocks (unless an underlying index has changed). Also, because of the way that a typical ETF is structured, they are usually much more tax efficient than any type of traditional index mutual fund.
ETFs help you to Diversify. ETF’s, like index funds, give you an efficient way to invest in a specific part of the stock market or bond market like small-cap stocks, emerging markets and/or energy. You can also invest in everything, like with the Standard & Poor’s 500.
You know what to expect with an ETF. Since ETFs track an index, it’s easy to find out exactly what’s inside them. The problem with traditional mutual funds is that their holdings are usually only revealed after a long delay and even then only periodically throughout the year. (Of course mutual funds that track a specific index are an exception.)
ETFs are user-friendly. Just like stocks, an ETF be purchased or sold at any time. When you compare this to mutual funds that are only priced once, at the end of each trading day, you can see how this can be beneficial. Of course it doesn’t matter as much if you are investing for the long-term but it’s certainly nice to know that, if you want to, you can get out of an ETF at any time during a trading day.
Of course, as with everything in life, there’s a slight catch; every time a buy or sell order is put in you’re going to pay a brokerage commission, just like you do when you trade stocks. If you’re buying several shares every day these commissions could add up quickly so, if you’re buying a little at a time, you might consider a traditional index fund instead. If you’re a lump sum investor however, ETFs are excellent.
If you don’t have the $2000 minimum required by some mutual funds, ETFs are an excellent alternative. With ETFs you can assemble a decent portfolio with as few as three of them as well as buying option contracts that can be shorted or bought on margin.
In closing, ETF’s are an excellent choice if you have a large sum of money that you like to invest, say from a 401(k) that you’re rolling over into an IRA.
On the other hand, if your goal is to regularly build on your investment in small amounts every month, you may wish to consider staying with mutual funds because they allow you to buy-in without paying brokerage fees, something that could seriously eat into your returns over time. There are certainly a few good mutual funds to choose from that track the bigger, more popular stock indexes.