If youre an investment buff, you might already know that investing in ETFs could equal big potential savings and other major benefits. On the other hand, if youre brand new to investing, you might want to consider investing in ETFs for several powerful reasons.
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In contrast to mutual funds, ETFs are generally known for their low fees. Ultimately, investors have flocked to ETFs in recent years (they actually arrived on the scene in 1993 as little-known investment options) but theyve now become a big deal because of low costs, tax savings advantages and solid performance, as well as the fact thattheyre usually centered around tracking a benchmark index.
Why is the benchmark index important? A benchmark will compare how well a fund is doing compared to its peers, so it gives you a point of reference for evaluating a particular funds success or performance.
An exchange-traded fund, or ETF, is traded on a major stock exchange and is an investment vehicle for investors toown shares of multiple securities using a single investment. An ETF contains assets such asstockscommoditiesorbonds.In general, ETFs alsotrade commission-free.
Theyre usually also less risky because they contain a collection of stocks and bonds, ensuring diversification. In addition, professional fund managers manage the fund for you so you dont have to waste time and effort putting together your portfolio.
Be aware, however, that some ETFscould carry with them an element of risk. For example, leveraged ETFs have been created to multiply the daily returns of an index or asset class, which brings about more risk than others which simply track an index.
Yourpersonal financial goalsshould be a major consideration in your decision to invest in an ETF. What is your time horizon?
When will you need your money? What is your investing style? Financial situation?Knowing the answer to these questions will help you make pointed decisions regarding the ETF(s) youll choose and also help you devise a consciously diversified portfolio.
Vanguard has a handy tool to help you determine in which ETFs youll want to invest. Check out Vanguardsasset allocation tool/investor questionnaire.
The pros and cons of ETFs should be heavily thought out before purchase. Pros include:
Liquidity in this case simply means that you can buy or sell at any time during the trading day. Depending on the asset class youre invested in, one may be more liquid than another. For example,real estateis less liquid than fixed income.
They can be less volatile than other types of investments.
If you decide to invest in an ETF that tracks a broad segment of the U.S. stock market (such as the S&P 500), this would definitely be considered less volatile than investing in straight stocks. However, be absolutely sure that the ETF youre considering investing in stays away from volatile stock indexes since they
be volatile. If youre interested in really low volatility, you could consider investing in an ETF that tracks a bond index.
ETFs can be the best of both worlds, in that they offer diversification and can be purchased on margin like stocks andyou can short sell them, too. They also trade at a price that is updated throughout the day, just like stocks. Youll get real-time pricing every time you buy and sell.
Depending on what youre interested in investing in, there are several different asset classes you can choose from, including real estate, fixed income, commodities, equities, and securities, etc.
If you need to sell an ETF, you can sell it just like a stock, right? Therefore, its sold and done, and there isno capital gainstransaction for the ETF until the fund is redeemed.
They may not actually be cheaper than mutual funds.
Youll want to do your research to find out if the ETF youre considering is as cheap as others that are similar.
Youll have to pay commissions to buy shares.
trade like stocks; therefore, youll pay a brokerage
In sharp contrast to trading one single stock,an ETF can showcase a broad range of securities, offering more diversification compared to one stock. ETFs can also trade like a stock, which means that certain features of stock trading are the same as with ETFs. Here are a few of those specific features they have in common:
Youll trade both stocks and ETFs on a stock exchange, such as NYSE.
Prices change throughout the day, and shares can also be shorted in the event that either a stock or ETF price begins to fall.
Despite these similarities, many choose ETFs over stocks simply because of the diversification thats inherently available in ETFs.
Because ETFs trade likestocks, youll need to pay commission to a broker every time you buy or sell shares. Most brokerscharge a small fee(typically under $10) to buy or sell an ETF.
However, there are certain families of ETFs that trade commission-free and those are worth looking into. For example,Fidelitydoesnt charge commissions for a specific group of its iShares ETFs. These types of commission-free ETFs are worth looking into; however, theyre typically not the best-performing ETFs by the various brokers.
In general, its best to compare and research those ETFs youre interested in and compare them to what youd pay for regular stocks,mutual fundsand more.
Benzinga has compiled a list of a few of the best ETFs, and they include the following:
The beauty of an ETF is that there truly is something for everyone, and the other major advantage is thatpassively managed funds like ETFs can beat managed funds over time. If youre interested in finding something that wont eat up your money through expenses, or something youd like to hold for the long term, seriously consider an ETF for your portfolio.
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