Investing in Exchange-Traded Funds (ETFs) offers numerous advantages that can appeal to both new and experienced investors.
Here are the top benefits of investing in ETFs
Diversification
The most appealing attribute of an ETF is it provides diversification by holding a basket of different securities or other assets.
This diversification helps spread risk and reduce the impact of any single underlying security’s poor performance.
For example, the Vanguard Total World Stock ETF is an ETF that holds investments in thousands of individual stocks in U.S. and foreign markets. The ultimate goal of the ETF is to track the performance of the FTSE Global All Cap Index.
Cost-Effectiveness
ETFs typically have lower expense ratios than mutual funds or other actively managed funds because the ETF tracks an index rather than employing active management strategies.
In addition, since an ETF is a publicly traded entity on a public exchange, there are no load fees which are often charged with mutual funds. The brokerage fees and commissions are also nominal.
Liquidity
ETFs trade on major stock exchanges. Investors can buy and sell ETF shares at any time during market hours at the current market price, similar to trading individual stocks.
This intraday trading capability allows investors to react quickly to market events and manage their portfolios more actively.
In contrast, investments in a mutual fund or other non-publicly traded investment are not readily tradeable, so investors must generally redeem their shares rather than sell them to a third party.
Transparency
ETFs are publicly traded entities, so they are regulated by the SEC. The ETF must provide regular disclosures that provide details on all of the individual stock investments, including how many shares are owned and the fair market value of the investments.