Exchange Traded Funds (ETF) are mutual fund companies that are tailored to grab specific markets including commodities, global stock indices, and metals. They have grown immensely, in terms of popularity, partly because of their simplicity. Some brokers offer the opportunity to trade these mutual funds on margin, facilitating greater gains, but at the same time greater losses also.
Features of Exchange Traded Fund (ETF)
- There are many features and advantages associated with ETFs.
- They are basically very inexpensive to hold for the long period of time, unlike other CFDs.
- Annual fees may span from around 0.2% to 2% annually.
- They are very simple to purchase and sale and need no specific knowledge of the futures markets.
- ETFs are not different in terms of risk.
- Your investment may fluctuate and can even go down as well as shoot up hence a right understanding of the risk factor is essential.
- It is also advisable to understand how the fund is going to monitor the underlying security.
- Many of the index ETFs purchase the individual shares to track the index closely.
- Many of the metal ETFs actually purchase the metal to store.
- It is not imperative to acquire knowledge about the futures market to invest with ETFs, but it is necessary to understand that there is no guarantee to monitor the underlying security.
What is an Exchange Traded Fund (ETF)
- Exchange traded fund (ETF) has been in existence since 1993, when the first ETF fund was launched.
- That original ETF, tracking the S&P 500 index, today is one of the most famous ETFs. Of late, ETFs became seemingly popular and emerged as a substitute to mutual funds.
- ETFs are index funds (low cost) that trade on major stock exchanges like stocks.
- They are made up of a bunch of securities, like mutual funds. However, an ETF bears its own ticker symbol and can be procured and sold in market hours like a specific stock through your broker.
Why Invest in Exchange Traded Fund (ETF)
ETFs have enjoyed a huge popularity amongst both individual and institutional investors, along with traders and other financial individuals. Despite the fluctuation in investments in ETFs, the risk is still meager compared to the money involved in mutual funds.
Benefits of Exchange Traded Fund (ETF)
- Tax efficiency
- Cost effective
- Transparency, trading liquidity and flexibility
- Exposure to particular sectors, industries, investing styles etc
- Immediate, low cost exposure to global markets
- Diversification - reduced risk
- Access to long/short strategies
- The diversification of most ETFs cuts down investment risk. Each separate stock is merely part of a basket; thus ETFs are less fluctuating than individual stocks.
- The best part is there is absolutely no minimum investment, so you are fee to buy as much as you can or as little as you wish.
- Investors often don't realize that prices play a vital role in cutting down their returns. Commissions, advisory fees, load fees, management fees, etc, when sum up, they will reduce overall investment returns comprehensively.
Tips for Investors
- Outperforming the market, particularly after fees, is tough and most of the investors seldom succeed.
- Most investors opt to buy an index ETF, which is low in price and eventually outperform most active managers.
- The most important factor for an investor to remember is the accurate asset allocation for his portfolio. ETFs allow active investors to simply adjust their asset demarcation as markets (and risks) fluctuate, increase or cut exposures quickly.
- One overlooked issue may turn out to be the high amount of taxable transactions in most of the mutual funds.
- Appropriately organized mutual funds offer high turnover of their portfolio, and more trades leads to additional taxation. (The tax is deducted from the investor’s fund, even if they don't sell their shares.)
- This, coupled with all the other costs and fees means an extensive reduction in a fund's return.
- ETFs are generally more tax efficient compared to mutual funds. They are basically developed to monitor benchmark indices, and in this way make fewer trades. The low portfolio turnover cuts down the chances of tax gain distributions.
- So in place of looking at the actual pre-tax returns of actively handled funds, you should analyze after-tax returns of current investments prior to deciding where to invest your hard earned money.
This may not be considered as tax advice and may not prove to be accurate at the time of reading. You must consult your tax adviser prior to taking a plunge into the market of Exchange Traded Fund (ETF).
Who issues Exchange Traded Fund (ETF)
There are myriads of companies offering ETFs. The most popular companies are Barclays Global Investors, Vanguard, Deutsche Bank, Lyxor, State Street Global Advisors, and many more.