Exchange-traded funds are much more flexible and appealing to investors because of many reasons. Here are some of the most important reasons for you to invest in one.
Trading like a Stock
Exchange traded funds trade like a stock. For comparison, mutual funds are priced once per day at the close of business hours. All people buying the fund that day receive the same price, regardless of the time when they bought the fund.
On the other hand, traditional stocks and bonds, ETFs trade intraday. This provides an opportunity for speculative investors to wager on the direction of shorter term market movements through the trading of a single security.
For instance, if an index, like the S&P 500, experiences a sharp rise in price throughout the day, you can take advantage of this movement by buying an ETF that mirrors the index. You can hold it for a few hours as the price continues to increase and then sell it for a profit before the end of the business day.
For comparison, mutual fund investors cannot enjoy this advantage. A mutual fund doesn’t permit speculative investors to take advantage of the daily fluctuations of the basket of securities.
The nature of ETFs that let it trade like a stock lets traders use other trading strategies like short selling and margin trading. In a nutshell, ETFs let investors trade as if they are trading regular stocks.
When it comes to helping investors save money, ETFs are great since they provide all of the benefits associated with index funds like low turnover and broad diversification—plus they cost less. Expense ratios for ETFs are from 1.10 percent to 1.25 percent. Meanwhile, mutual funds have a range of 0.01 percent to 10 percent.
On the flip side, bear in mind that ETFs trade via a brokerage firm, which charges commission fees for transactions. To avoid letting commissions costs offset the value of a low expense ratio, look for low-cost brokerage and invest in increments of $1,000 or more.
ETFs can also be an excellent choice for buy-and-hold investors who are poised to execute a large, one-time investment and then sit it through.
ETFs and Diversification
ETFs are a good choice if you want to achieve diversification. There are hundreds of ETFs out there, and they cover every major index and sector of the equities markets. You can invest in international ETFs, regional ETFs, and even country-specific ETFs. Specialized ETFs are those that are for specific industries.
They also covers other asset classes like fixed income. Meanwhile, ETFs provide fewer choices in the fixed income category, but there are still a lot of options like ETFs that consist long term bonds, mid-term bonds, and short-term bonds.
While fixed-income exchange traded funds are typically chosen for the income produced by their dividends, equity ETFs are also made up of ones that pay dividends. Such payments can be put into a brokerage account or reinvested.
If you are thinking of investing in dividend-paying ETFs, make sure that you check the fees before reinvesting the dividends. There are firms that provide free dividend reinvestment and are others that do not.