If you like to play the market, hedge your risk, or even invest in foreign sectors, then you should consider buying an ETF. Exchange traded funds are getting more popular by the day and the selection has never been higher - for good reason. So if you haven't gone long with any of the types of ETFs available, then here's some good reasons why you should...
1. Investing in the Market
Many investors (novice and advanced) like to play the market. Whether you want to get long the NASDAQ or the DOW, there’s an ETF to help you do just that. Market ETFs like SPDRs, QQQQ’s, and diamond ETFs (oh my), are ways to invest in stock markets without having to buy individual stocks, indexes, or even high cost mutual funds.
2. Invest in Foreign Markets
Just like investing in a domestic market, you can buy ETFs to invest in foreign markets as well. However, with foreign ETFs you can take it a step further. There are emerging market ETFs, foreign currency ETFs, and ETFs for specific countries like China. Investing in foreign regions has never been easier with all of the different types of foreign ETFs.
3. Invest in Industries and Sectors
Maybe you don’t want to play the market as much as you like a particular sector. Do you think the gold mining industry is headed for a boom? Buy a gold ETF. It’s as simple as researching a sector and finding the appropriate industry ETF. Less messier than trying to corner the market on industry stocks.
4. Invest in Commodities
We love to invest in commodities, but we don’t like owning commodities. Who wants cattle grazing in the living room or oil rigs on the front lawn? With commodity ETFs, you can emulate the price of oil and livestock without having to get your hands dirty. Want to invest in coal? Buy a coal ETF. Want to get long wind energy, buy a wind ETF. Simple as that.
5. Buy ETFs to Get Short
Yes, you read that right. You can buy an ETF and actually put on a short position. They are called inverse ETFs, and they allow you to inversely track an index or underlying asset without having to worry about margin restrictions or short selling. Get short by getting long an inverse ETF.
6. Hedge Risk with ETFs
If you like to trade options, especially index or ETF options, buying an ETF is a great way to hedge puts or even a short call position. And in some cases, you can hedge a short index or commodity position with a long ETF position. So ETFs can be a great tool to minimize risk in your trading strategy.
7. Create a Revenue Stream
Many investors love dividends. And dividend ETFs are a way to get more of a good thing. There are exchange traded funds specifically created to include dividend stocks that create a revenue stream in your portfolio. Just be aware that taxes on ETF dividends are treated a little differently.
And dividend ETFs are not the only way to create a revenue stream, bond ETFs do so as well. Just as with any bond, a bond ETF focuses on assets that generate interest payments within your portfolio, so ETFs can offer two ways to create a revenue stream.
8. Diversify Your Investing Strategy
We’ve outlined many ETF investment strategies already, but there are many more as well. ETFs are great plays for earnings season. There are leveraged ETFs for investors who have higher risk tolerance, and traders can play volatility with ETF option straddles. The strategies are limitless.
9. Reap ETF Benefits
And more than diversifying your trading arsenal, ETFs have many advantages over other investments. The battle between ETFs and mutual funds has been very heated, but ETFs also have some edge over indexes and stocks as well. No investment is the end all be all, so ETFs have their disadvantages, too. But I’m here to tell you, you should consider buying ETFs over other investments in certain situations.
10. Reap the Tax Benefits
While I am not going to outline all of the advantages of ETFs in this article (there are plenty of others that do that – see above), the tax advantage has to be mentioned. The biggest ETF benefit is the way they treat capital gain taxes – they are not realized until the entire ETF is sold. This is different from mutual funds and indexes where the capital gain tax is realized when trades are made during the life of the position.
11. Save on Commissions and Fees
Can ETFs save you money? When it comes to trading fees, yes. When you buy or sell an index basket, you pay commissions on each trade within the basket. Same with mutual funds. When you buy or sell an ETF, it’s one trade, one transaction, one commission. And while some ETFs have management fees, they generally tend to be lower than mutual funds, so more savings there as well.
So if you haven’t included ETFs in your portfolio, it’s high time you should. Getting started with ETFs has never been easier. However, as with any investment, conduct thorough research and make sure you know what is in an ETF before you buy it.