Consider a basketball team, made up of key players like a point guard, shooting guard, power forward, small forward and center. Together, they can diversify their strengths to win the game. Similarly, an ETF is like a “team” made up of diversified “players” like stocks, bonds and commodities that tracks against the “goal” of matching its performance to an index, such as the S&P 500. In doing so, it potentially provides more predictable returns than other investment choices.
EXPLORE THE ADVANTAGES
1) ETFs diversify investment portfolios and lower risk
By incorporating ETFs within an investment strategy, investors can benefit from instant diversification. ETFs offer greater diversity than simply buying individual stocks because they pool together different assets, such as stocks, bonds and commodities. Financial professionals can help investors reduce the risk in their portfolios and maximize their potential returns through diversifying their investments.
2) ETFs demystify investing
Generally, ETFs are transparent because they show what the underlying investments in the ETF are. This is not always the case, for example in a mutual fund, where the portfolio manager has the discretion to choose not to reveal the investments in the fund.
3) ETFs provide greater access to different markets
ETFs provide access to markets across the globe, ranging from specific countries to an asset class like global bonds – and even commodities like gold. Investing in difficult-to-access markets such as emerging markets becomes much more straight forward by investing in ETFs.
4) ETFs are easy to trade
Part of the appeal of ETFs is their liquidity, which provides the flexibility to turn an investment into ready cash quickly, with no loss in value. In most cases, mutual funds can only be bought or sold once a day at a price established at the market close. ETFs, however, act similarly to stocks so they can be bought or sold anytime during market hours.
One common misconception that investors ask is, “Are ETFs more volatile because they are traded throughout the day?” The answer is simple – no, price changes do not make the investment more volatile, just more visible.
Because ETFs have the same trading flexibility as stocks, short-term traders can use ETFs to quickly move in and out of a position. But ETFs are also a cost-efficient way to build a long-term, core portfolio.
5) A big draw of ETFs is the bottom line—reducing costs
The management fees for most ETFs tend to be much lower than mutual funds, which means more money can be put towards a potential return. As an example, iShares Core ETFs average about one-tenth the net expense ratio of most mutual funds.1 The impact of these cost savings can be meaningful, particularly over time or when market returns are low.
Here’s another potential benefit. ETFs tend to be relatively tax efficient and incur fewer undesirable capital gains distributions, which occurs when an investment appreciates in value and is sold. Reducing the impact of taxes on an investment can help improve the return on an investment.
