Why You Should Invest In Exchange Traded Funds (ETFs)

By Susan Baker
Updated January 22, 2015
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Why You Should Invest In Exchange Traded Funds (ETFs)ETFs or exchange traded funds are fast becoming one of the hottest ways to invest, and while no investment is completely secure, they do offer quite a few benefits, including a lower risk than that offered by many other investments on the market. These can include various assets. In fact, one ETF could be loaded with hundreds or even thousands of investment opportunities, which offers quite a lot of diversity to your portfolio. These assets are very much like a mutual fund in the way that they are placed together, but they trade like a stock does on the exchange. The first ETF was launched in 1993 as SPDR came on the market, and since then it is picking up pace and soaring to having doubled in the last five years alone, making them a force to be reckoned with.

Intraday Trading

One of the benefits that exchange traded funds offer is that they trade like stocks and bonds rather than like mutual funds. This means that they are traded intraday, which gives you ample opportunity to bet on short term market movements. A steep price change in one day can lead to an ETF being purchased that mirrors this rise. You can hold onto this fund as the value increases and let it go before the end of the day for a short move that pays off in the end. And you can do more than just trade intraday. You can also use speculative strategies and trade on margin. This is an amazing feature because it allows you to trade the entire market in a way that appears as though it were one stock.

Saving Money With Low Expense Ratios

Exchange traded funds also offer the incentive of low expense ratios, which means that you can save money as they work for you in your portfolio. They have a low turnover and can be very diverse, as they are actively managed, but are not required to do better than their benchmarks, but rather meet them on the market. ETFs also cost quite a lot less to invest in, which allows you to make money as you save money. An example of this can be seen in the Vanguard 500 Index Fund which runs at one of the lowest costs on the market, yet is constantly succeeding. Unfortunately, because ETFs do trade like a stock through a broker you will end up paying commissions and fees for each investment that you make, and there is usually an annual fee associated with this form of investment as well.

Tax Efficient Investments

Exchange traded funds are also highly tax efficient, and this is the reason that many investors turn to them to diversify their portfolio without pushing up their tax brackets. They offer low turnover with a large volume of redemption, but don't have a large capital gains distribution. All in all this makes them a very attractive investment for those who want to get into the market, but don't want to spend a fortune or get caught up in unfortunate tax pitfalls.

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This site offers information designed for educational purposes only. You should not rely on any information on this site as a substitute for professional medical advice, diagnosis, treatment, or as a substitute for, professional counseling care, advice, diagnosis, or treatment. If you have any concerns or questions about your health, you should always consult with a physician or other health-care professional.