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An exchange traded fund is a basket of investments, usually either stocks or bonds, but could also include real estate, commodities, or other assets, that is traded on stock exchanges. Investing in exchange traded funds offers investors a plethora of options and flexibility to build a diverse portfolio quickly. Below are the three greatest advantages of investing in ETFs.
1. Low Cost Trading With ETFs
ETFs are similar to index funds in the sense that they are typically constructed to track a specific index. This means there are no management fees, allowing for low costs. Unlike mutual funds, which often require large minimum investments, investors can purchase as many or as few shares of an ETF as they wish. Further, investors can purchase ETFs through an ordinary discount brokerage just like stocks.
2. Trading Flexibility is Possible With ETFs
ETFs also offer great purchasing flexibility. Unlike mutual funds, which can only be purchased once a day, exchange traded funds can be bought throughout the day at variable prices. Investors can also place limit orders, buy on margin, and sell short when utilizing ETFs. ETFs are also a great option for those with a dollar cost averaging strategy, where a specific dollar amount is invested on a regular basis.
3. ETFs Offer Instant Diversity
Perhaps the biggest benefit of investing in exchange traded funds is the ability to build a diversified investment portfolio almost instantly. Because ETFs consist of a bucket of holdings, investors can own a broad mix of companies, including U.S., international, and even bonds, with just a few exchange traded funds.
Want to track the S&P 500? There’s a fund for that. Looking for international exposure? There’s a fund for that. Think emerging markets are about to take off? There’s a fund for that. Interested in investing in green technologies, but unsure which company to focus on? There’s a fund for that. There is an exchange traded fund for virtually every index, sector, or region imaginable. Further, with so many new funds created, investors will be hard pressed to think of a strategy for which there isn’t an ETF in which to invest.
