If you are looking to diversify your investments, hedge against risk, or gain exposure to a certain market sector, ETFs can be the perfect asset for your portfolio. Investors who take advantage of ETFs and include them as part of their trading strategy reap many of these benefits.
1. Single Transactions
ETFs act like indexes and follow certain market sectors. However, unlike an index, you can purchase an ETF with one single transaction. You are purchasing a mini-portfolio, not a basket of stocks. That makes life easier when targeting a certain price.2. Cost-Effectiveness
Since there is only one transaction per trade, commissions are lower on an ETF as opposed to an index, which requires a basket of stocks. Also, there are no load fees, and managing fees tend to be lower for ETFs as opposed to regular mutual funds.3. Taxes
Capital gains taxes are generally lower for ETFs than traditional mutual funds due to the structure of each trade. Therefore ETFs are a "tax friendly" investment.4. Derivatives
Many ETFs list options and futures contracts, which are great tools for risk-managing your portfolio.5. Flexibility
Like an equity, ETFs trade throughout market hours, can be sold short or on margin, and prices are continuously updated during the trading day.6. Accountability
The company sponsor of the ETF publishes the list of assets in the fund on a daily basis. Most funds publish the constituents on an infrequent basis.7. Passive Management
ETFs are meant to follow a particular index, not outperform it. Therefore, only minor adjustments are needed for the ETF, as opposed to an aggressively managed fund. This in turn lowers risk and management fees.8. Immediate Dividends
With most ETFs, (open-ended) dividends are immediately reinvested back into the fund. In the case of traditional funds, the time frames may vary.9. Simplicity
ETFs are simple in structure and easy to understand. If you are looking to invest in a certain industry or want to emulate the ROI on a particular index, you are only a trade away from getting started with ETFs.
There are many advantages to including ETFs in your investment portfolio. While mutual funds, equities, derivatives, and indexes are solid investments, ETFs are a weapon that should be part of your investing arsenal.
