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The Benefits Of An Exchange-Traded Fund (ETF)

By on March 5, 2013

Look No Further To Diversify Your Portfolio

An exchange-traded fund is a security that trades like a stock on an exchange but represents several assets as a single investment. Investing in an ETF can allow for diversification, giving an investor exposure to several different market sectors or groups of equities simultaneously. This style of holding a group of stocks rather than a single stock also has lower management fees and better chances for higher profits intraday.

Advantages of Investing in an ETF

An ETF is a passive stock, it is not managed and there are not as many fees attached to the account as a mutual fund (which can have fees that include management fees, servicing fees, load fees, paying a board of directors, and shareholder accounting expenses.) ETFs can still be shorted or purchased on margin just like a single stock. The possibility of trading futures and options is also possible with ETFs letting any investor manage their risk at their own disposal. Using an ETF ticker symbol any ETF can be searched, the price is updated throughout the day and any stock-quote website can equip you with an ETF update. Other advantages include limited tax exposure compared to mutual funds as well as a lower chance of the price of an ETF being listed higher or lower than its actual value.

Tips on Choosing an ETF

If you trade frequently or are dealing with a relatively small amount of money, be wary of trade commission which can rack up.  On larger chunks of traded stock a $6 to $9 trade commission fee does not make so much of a difference compared to a percentage of a smaller amounts of trades which can quickly add up, putting a burden on your investment strategy. There are some ETFs that are available commission-free and these should be sought after, but some come with restrictions so do your research. Also, take a look at the expense ratio which is the associated fees based on annual operation of the fund. The nice thing about ETFs is that the expense ratio is typically lower than that of a mutual fund. These types of ratios should be compared to reap maximum profit.

Risks and Disadvantages of ETFs

Some disadvantages presented by ETFS is that the bid-ask spread can be high in some cases. The bid-ask spread is the difference in the asking price and bidding price that is ‘spread’ across an amount of stocks. Also, choices may be limited to mostly large-cap stocks. An investment into an ETF with a large-asset base is safest though (at least $50 million.) This is because some of the smaller companies are more at risk to close. To start researching ETFs, visit our markets page section.

By: Eva Cantillo






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