The case for ETFs

BlackRock |Jun 21, 2019

You’re probably familiar with the concept of mutual funds, and may even own at least a few in your retirement or other accounts. Yet, you may be less informed about another investment vehicle that has become widely used by many types of investors: exchange-traded funds (ETFs).

What are ETFs?

First, a basic definition. ETFs combine familiar features of mutual funds and individual stocks. Like mutual funds, most ETFs are made up of many stocks, bonds or other assets. Like an index fund, an ETF aims to track the performance of a specific market benchmark, like the S&P 500 or the Russell 2000. And like shares of stock, ETFs are traded on an exchange throughout the day.

Want to get grounded in ETFs? Here are three facts to get started.

ETFs are not niche products

ETFs have been around for more than two decades, but they’ve really taken off in the past five years or so. Today, investors of all types — from individuals to sophisticated institutions — have helped increase ETF assets to more than $3.1 trillion globally. And while that’s still a fraction of the $21 trillion invested in mutual funds, ETFs are growing at a faster pace, more than doubling in size over the past five years.1

Part of the appeal of ETFs is their flexibility. Unlike mutual funds, which can only be bought or sold once a day, at a price established at the market close, ETFs can be traded whenever the market is open, just like stocks. Investors can also trade them in the same way they do stocks, including selling short, or buying on margin, and there is no minimum investment amount required.

ETFs have grown tenfold over the last two decades

ETFs have grown tenfold over the last two decades

Lower costs help you keep more of
what you earn

An even bigger draw of ETFs is the bottom line—reducing costs. The fees for most ETFs tend to be much lower than mutual funds, which means more money gets put to work for you.

In fact, iShares Core ETFs average about one-tenth the net expense ratio of most mutual funds.2 The impact of these cost savings can be meaningful, particularly over time or when market returns are sluggish.

ETFs make it easy to get in—and
stay in—the market

Ultimately, of course, pursuing your financial goals is about staying invested. Timing market ups and downs is nearly impossible to get right, and missing out on the rebounds can be costly. In the example here, missing just the five top-performing days over the past 20 years would have cost more than $160,000; missing the top 25 days would have nipped nearly 75% of potential gains.

So instead of trying to outsmart the market, it may make more sense to simply be in the market, smartly.

Missing top-performing days can hurt your return

Hypothetical investment of $100,000 USD in the S&P 500 Index over the last 20 years (1996)

Missing top-performing days can hurt your return over the long term

For illustrative purposes only. The graph above shows how a hypothetical $100,000 investment in stocks would have been affected by missing the market’s top-performing days over the 20-year period from January 1, 1996 to December 31, 2015.
Sources: BlackRock; Bloomberg. Stocks are represented by the S&P 500 Index, an unmanaged index that is generally considered representative of the U.S. stock market. Past performance is no guarantee of future results. It is not possible tin vest directly in an index.

Convenience, cost and choice. Three reasons why more investors should consider building the foundation—the core—of their long-term portfolios with ETFs.

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