What are the Advantages of Investing in an ETF?
Investing in an Exchange-Traded Fund has numerous advantages, including the following:
Lower transaction and fee costs: ETFs typically have lower expense ratios than comparable
mutual funds. This is due, in part, to their exchange-traded nature, which places typical costs on
the brokers or exchange, as opposed to a mutual fund, which must bear the cost collectively.
Access to markets: ETFs have paved the way for individual retail investors to gain exposure to
asset classes previously unavailable to them, such as emerging market equities and bonds,
gold bullion or other commodities, the foreign exchange (forex) market, and cryptocurrencies.
Because an ETF can be sold short and margined or leveraged, it can provide opportunities for
Transparency: When compared to ETFs, hedge funds and even mutual funds operate in a less
transparent manner. Hedge funds, institutional investors, and mutual funds typically report their
holdings only quarterly, leaving investors unsure whether the fund is adhering to its stated
investment strategy and managing risks adequately. In contrast, ETFs typically disclose their
daily portfolios, which allows the investor to stay more informed about how his or her money is
ETFs are more liquid than mutual funds because they can be bought and sold in secondary
markets throughout the day, whereas mutual funds can only be bought and sold at their
end-of-day closing price. They typically trade near their true Net Asset Value because their
mechanism of creation/redemption constantly balances out pricing arbitrages, bringing the price
of ETF shares back to fair market value.
Tax Efficiency: In general, ETFs outperform mutual funds in terms of after-tax performance for
two reasons. To begin, ETFs reduce portfolio turnover and provide the ability to avoid short-term
capital gains (which are taxed at high rates) through in-kind redemptions. Second, ETFs can
circumvent rules that forbid selling and realizing (claiming) a loss on a security if a very similar
security is purchased within a 30-day period.