ETF-trading has significant advantages that make it ideal for people looking for safe, diversified and affordable investing.
Online stock trading with a competitively priced brokerage is one of the major aspects of affordable trading. You can invest directly in stocks or you can invest in funds such as exchange traded funds (ETFs). The advantage of ETF trading is that you get access to a variety of stocks rather than picking out each stock and investing directly. So let’s take a look at what ETFs are.
Why ETFs Are Great for Safe and Affordable Investing
Financial advisor Kevin Simpson gives the lowdown on ETFs. ETFs help you with diversified investment at lower cost. They trade in the manner of common stocks but include a wide range of underlying assets apart from stocks and bonds, such as gold, foreign currency, oil futures, etc. These assets can be owned in terms of shares, but shareholders don’t have direct ownership of these assets. However, shareholders earn massive benefits through dividends – which are a part of the profits, residual value and/or earned interest during the liquidation of the ETF fund.
ETFs provide you with flexibility, low-cost indexing and tax efficiency and are therefore ideal solutions for your investment goals, be they retirement, some big purchases, or home down payment. ETFs can be sold or transferred on the stock market exchanges quite like any other stocks. So you have something that is beneficial in every possible way. ETFs provide an affordable means to invest in funds that are globally diverse.
The popularity of ETFs has been such that in the United States alone they have managed to make up more than $1.7 trillion in assets since they were developed first in 1993.
ETFs Have Distinct Advantages
Specifically, Kevin Simpson highlights certain key advantages of ETFs:
- They are flexible and accessible, since anyone having a brokerage account with the money for one share or even a fractional share can purchase ETFs. They are ideal for short-term or long-term investing.
- They follow a pattern of natural diversification as per the norms of the Investment Company Act, 1940 which mandates diversification rather than concentration in a particular industry sector or company. That means you don’t face any kind of overexposure to a particular stock, industry of bond. This diversification is essential to reduce risk.
- ETFs are affordable. Their pricing matches that of underlying assets. You have a good deal of ETFs that are index funds though not with any additional fees, unlike mutual funds that charge further fees for their active management through brokerage systems and financial advisors. ETFs don’t have middle mean. The costs for ETFs only consist of the expense ratio which includes the administrative fees, licensing from data publishers and manager compensation. So, for a much lower budget, you can buy index ETFs at prices much lower than the equivalent index mutual funds.
- As this report states, mutual fund fees could be anywhere from 0.01% to more than 10%. ETF expense ratios are between 1.10% and 1.25%. The key to ensure affordability in ETFs is to find a low-cost brokerage since ETFs trade through brokerages and commission charges determine the price of the ETF. Then invest in increments worth $1000 or more.
- The tax efficiency is another advantage of ETFs. Like index funds, they do not generate internal capital gains from churning, which is the frequent bond sales and stock movement by management and investors. Being mutual funds, ETF shares can be redeemed or issued only towards the end of the day.
ETF trading is therefore a cost-effective and flexible option, particularly for those who aren’t quite avid investors and need to find something safe and affordable for their portfolio.
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