There’s no denying that ETFs are the word on everybody’s lips right now. Ever since they were introduced, they have been pushed heavily by many financial advisors and brokers. Exchange traded funds have many characteristics and advantages that set them apart from other types of investments, which is one of the main reasons why they are so popular right now. But what are they exactly and why all the rage?
What are ETFs?
Exchange traded funds are a form of marketable security that work by tracking a particular index, commodity or bonds. In many ways, they are very similar to mutual funds, but the main difference is that they are traded on the stock exchange just like any other stock. ETFs are subject to price fluctuations during the day, just like stocks. Also, since ETFs are traded like stocks, they do not have a net asset value that is calculated at the end of each day like mutual funds.
What are some of the Reasons People go for ETFs?
There are many factors that push people to go for ETFs over other types of investments. One of the major factors is liquidity. Advisors can go in and out of positions as they please and trade ETFs on the stock exchange’s secondary market. With mutual funds, you usually have to go through the three day settlement process which can be a major issue for some people. Just like stocks, advisors can sell an ETF short, make stop limit orders and trade on a margin among other things.
ETFs are Affordable
Another aspect of ETFs that attracts investors is their affordability. One of the many issues facing advisors who work with mutual funds is that they have to deal with a sales load charge, which could affect their clients’ returns. ETFs are bought and sold just like any individual security, which makes them more beneficial. Transaction costs will usually be lower than with load funds as a result, which is especially beneficial for advisors who use an active trading ETF investing strategy.
Complete Coverage of the Market
What ETFs allow investors to do is cover large portions of the stock market without having to deal with a portfolio manager. This allows for more easy and efficient diversification. There are even exchange traded funds that allow investors to edge their losses and bet on any direction the market takes, quite similarly to binary options. ETFs also allow investors to invest more directly into commodities than regular open ended funds which often have a cap on the exact quantity of a certain commodity you can invest in using the fund.
Conclusion
With all the advantages ETFs have over other financial instruments such as mutual funds, we can expect ETFs to be even more popular in the future. They allow investors to access liquidity more easily and efficiently, are much more flexible than mutual funds and are also much more versatile. Until there are major changes in the way mutual funds are traded in the future, it seems that ETFs are here and here to stay.
