1.What are the Advantages of ETFs?
- Diversification: Owning an ETF allows investors to hold a basket of securities and have exposure across an entire index. An ETF offers the intraday trading opportunities of a stock with the diversification of a mutual fund. Diversification primarily helps reduce volatility and also has the potential to enhance your returns.
- Low Expenses: Most ETFs are index based and not actively managed. Because of this, they are less likely to carry high management fees and usually have lower annual expense ratios than other investment vehicles.
- Tax Efficiency: When ETF creations and redemptions are in-kind, it substantially lessens and possibly avoids capital gain distributions. In-kind distribution transfers with institutional investors lessens the possibility of the fund from incurring capital gains as a result of shareholder trades. However, the ETF structure does not necessarily eliminate all capital gains distributions.
- Flexible: Any ETF can be bought and/or sold with the same flexibility as an individual stock. This allows investors to place stop-limit orders, buy on margin, or sell short. Any of these transactions would make them subject to the same terms that would apply to individual common stocks.
- Transparency: Investors will know exactly what they purchase. The holdings of ETFs are listed on a daily basis, whereas mutual funds generally release their holdings quarterly. The transparency of the ETFs' portfolios allows investors to easily obtain or hedge exposure to a specific group of securities.
- Tradability: ETFs can be purchased or sold during the trading day. They are listed on an exchange, so it is easy for investors to buy or sell shares throughout the day. Because ETFs are listed, investors can obtain up-to-the-minute share prices, and trade the relevant index as though it were one single stock.
2.What is an Exchange Traded Fund / ETF?
An Exchange Traded Fund (ETF) is an investment fund that is priced and traded on an exchange throughout the day just like a stock. ETFs hold a basket of securities (stocks, bonds, real estate, commodities), and most track an index. Since the launch of the first ETF in 1993, ETFs have gained tremendous popularity and there are now more than 1,500 available, representing over $1.5 trillion in assets.
3.What is the Difference Between a Mutual Fund and an ETF?
Exchange traded funds are bought and sold similar to any other stock through a brokerage account.
Unlike mutual funds, which can only be traded after the close of trading, ETFs trade regularly during open market hours. ETFs also allow an investor to determine their entry and exit prices whereas with a mutual fund, the execution price is the nightly NAV plus any transaction costs and fees. ETFs are, however, subject to transaction costs including brokerage fees and commissions.
Beyond the trading flexibility, ETFs also boast numerous other benefits to investors in that they have lower costs, increased liquidity, are more transparent, and more tax efficient.
4.How Do ETFs Provide Lower Costs?
Due to their low portfolio turnover, ETFs tend to have lower expense ratios than traditional mutual funds. ETFs also do not impose back-end redemption charges, or load fees, like many mutual funds. Brokerage commissions will impact returns.