In this economy, there’s no doubt you are looking for ways to cut costs. Whether it's a coupon for a can of soup at the supermarket or turning down the thermostat to reduce your energy bill, you're trying to find ways to save money. So why not look at your own trading strategy?
High commissions and management fees, not to mention taxes, can really eat into your investing profits, so it only makes sense to consider exchange traded funds to reduce these costs. Here are five ways you can reduce your investment overhead with ETFs.
1. Lower Commissions from Stock Trading
Whether you are filling an index basket or trying to beat the market with a mutual fund, you are trading stocks. The buying and selling of multiple equities takes place with every transaction. However, if you’re using ETFs, the equities are already pre-packaged for you in one asset. One trade, one price, one commission.
Use an ETF instead of an index and you don’t have to buy multiple stocks to fill the basket. Use an ETF instead of a mutual fund and track a market without having to day trade. Less stock trading means lower commissions.
2. Lower Management Fees
Don’t misunderstand, ETFs have their fair share of fees too, and every ETF is different. However as a whole, mutual funds tend to have higher management fees than exchange traded funds. And if you can find the right ETF to replace a particular mutual fund, one of the advantages may be a lower management fee.
3. Lower Taxes
Well, maybe not lower taxes per se, but there’s definitely a tax advantage when it comes to ETFs. When trading an index or mutual fund, a capital gain is realized as soon as you make a profitable buy or sale of an equity within the basket or fund. With ETFs, those gains are not realized until the sale of the entire ETF. Therefore, due to fewer transactions, there aren’t as many capital gain taxes clouding your return.
4. Lower Hedging CostsObviously you can hedge ETF options with an ETF. However, did you know you can hedge index options with ETFs in certain situations? For example, if an ETF correlates well with an index, it may be easier to buy the underlying ETF against some puts instead of an index basket. As we said, using an ETF instead of an index can save on commissions. However, just make sure the correlation works and your clearing company realizes the ETF is a hedge and not a separate transaction.
5. Reduce Margin Complications
Selling an index short can cause havoc for your margins and might even get you a call from your clearing company. However, there is a way to get short without selling. Enter inverse ETFs. A simple transaction that is designed to create a short position by actually making a buy trade. So if there are financial reasons you can’t get short, then inverse ETFs may be your best solution.
Any time you can save money and still gain exposure to a sector, market, or commodity, it’s a good thing. So guess what? ETFs are a good thing. It’s time you got started with exchange traded funds and reduced your trading bill.