1. Individual Transactions
ETF funds replicate the reference stock portfolio. Therefore, ETFs can track specific industries, regions, or any other sector that an index can follow. However, investing in a traditional index requires investors to purchase each security in the index’s basket of stocks individually.
2. Liquidity
They simplify the purchasing process in ETFs, but not at the expense of liquidity. Like stocks, ETFs trade all market hours. They also trade frequently. The SPDR S&P 500 ETF (SPY) is the most popular ETF by volume, with over 100 million shares traded on an average trading day. This liquidity allows investors to jump into or out of positions at will.
3. Cost Efficiency
It’s easy for investors to save money with ETFs. Since there is only one transaction for each trade, you will avoid the accumulation of commission fees that can occur when adding a basket of stocks to your portfolio. Management fees are generally lower for ETFs compared to regular mutual funds, and you’ll avoid any shipping fees.
4. ETF Taxes
If you’ve been researching ETFs, you’ve likely seen them referred to as a “tax-friendly” investment. Compared to traditional mutual funds, this is generally correct. Mutual funds usually trade more actively than ETFs, and each trade opens up a chance for capital gains taxes to be levied. Capital gains taxes typically accumulate for mutual funds and are imposed on fund holders annually.
5. Derivative Instruments
For those who enjoy using options, swaps, and futures contracts as risk management tools, they have this option with ETFs. Whether you want to hedge your ETFs with calls and puts or trade ETF volatility with options movements, you’re likely to find an ETF with this flexibility.
6. Accountability
Financial entities behind actively traded ETFs must publish the fund’s asset list daily. While similar mutual funds don’t require the same disclosures, investors know less about the products in their portfolios.
7. Passive Management
While some ETFs are actively traded, many are managed passively. Passive ETFs replicate a specific index or benchmark without trying to outperform it (although that may happen occasionally). Therefore, funds don’t need significant adjustments, unlike a mutual fund trying to outperform its underlying index. This difference leads to relatively lower risks and reduced management fees for ETFs.
8. Immediate Distributions
Most ETFs distribute dividends just like stocks. You will receive a quarterly dividend payment in your brokerage account. In the case of traditional mutual funds, the time frames may vary. Many mutual funds distribute dividends annually instead of quarterly.
9. Simplicity
ETFs have a simple and easy-to-understand structure (except for advanced products like leveraged and inverse ETFs). The best investors fully understand their investment products, and simple products like ETFs reduce barriers to investment understanding. So if you are looking to invest in a certain industry or wish to mimic the returns of a specific index, you only need one transaction to start investing in ETFs.
There are many advantages to including ETFs in your investment portfolio. While mutual funds, stocks, derivatives, and indices are strong investments, ETFs are a financial tool that should be part of your investment arsenal.
Source:
https://www.thebalancemoney.com/nine-reasons-etfs-can-benefit-your-portfolio-1214711
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