Many people first learnt of ETF trading when they were offered the option of including these funds in their established, long term portfolio. More and more companies are lately increasingly recognizing ETF advantages and are getting aware of the limitations of ETFs. They have now started identifying and accepting the ETF pros and cons while including the use of long term ETFs in mixed portfolios.
Advantages of ETFs
- ETF advantages include lower trading costs, 24×7 trading, short selling possibility using inverse ETFs, margin trading and leveraged trading
- Other advantages of ETFs for retail traders are low minimum capital required, helps diversify your portfolio, invest directly with AMC to save cost
- Transparency in ETF portfolio & trades help short term and day traders
Because of the relatively low risk and steady growth, ETFs have started gaining huge popularity.
There are over 1500 different exchange traded funds listed by the American Stock Exchange. These funds represent a wide range of indexes and market sectors, including industries, broader stock market indexes, most other sectors in the markets and also international regions around the world. An ETF can also engage in representation of Treasury and corporate bond indexes.
Understanding ETF advantages and what all goes into ETF trading will be necessary before deciding to participate in an ETF. As an investment vehicle, these funds can deliver amazing returns on investment with a little bit of effort. ETFs are generally like index funds set up to track one of the large market indexes such as the S&P 500.
9 ETF advantages
There are many advantages to using Exchange Traded Funds that are not available with mutual funds. Just like mutual funds, the ETFs track stock market indices such as S&P 500.
1. Trading cost
A trader will find that the cost of trading ETFs is significantly less than for other funds. The cost of trading can be as low as zero dollars (FREE or NO brokerage) when an online discount broker is used. The cost of trades can go as high as twenty dollars per trade depending on the broker.
For an investor of any size — including large institutional or small non-institutional investors — there are a great many ETF advantages (small investors usually get into it through a trading system). Fund costs are usually much lower due to the lower annual expenses and, since they’re not indexed based, they usually have low management fees.
It is important to find out before committing to a broker what their fees are. The costs that normally increase the trade costs for mutual funds do not exist with ETFs. For instance, there is no added cost to cover stock purchases of individual companies with a basket or sector.
2. Direct Investment in ETFs
There are many large institutional investors offering services of buying and selling ETFs directly – also called direct Investment in ETFs. This lowers the cost of the funds to the investors using these companies for brokerage services.
This and the previous ETF advantages help lower the transaction costs to a level that every retail trader can afford.
3. Basket of stocks traded at once
Another biggest ETF advantages is for investors who wish to participate in ETF trading. They can sell or buy shares as a collective instrument. They can thus see the performance of one or several of an entire portfolio of bonds or stocks as a single security.
As an arrangement, there are many benefits to doing so. This includes combining liquidity of stock investing with all the benefits of investing using traditional fund indexing.
4. Round the clock Transaction
ETFs have much more flexibility than mutual funds in the market. They can be traded, bought and sold, at any time during the trading day. Mutual funds can only be traded at the end of the trading day. There are no bigger ETF advantages than this one if you are just a part time trader.
Many small investors of the non-institutional variety go one of two ways when trading in an ETF; they usually trade all day or they make their moves to single trades carried out at at the end of the day. There is really no restriction placed upon trading activities by the ETF when it comes to this, though. ETF trading, then, usually turns out to be very easy.
If you don’t have time during the day when exchanges are open, and you wish to invest at low cost for a short term, then CFDs (contract for difference) offer really cheap 24-hour trading on same stock market index as the one tracked by an ETF. Read the following article for more information.
5. Short selling possibility
Amongst other advantages of ETFs is the one related to the concept of short selling. Short selling means “selling an asset when you don’t actually own it” ETFs can be short sold at any time.
This is different from other funds which can only be sold when their price is more than the last closing price of the stock.
6. Margin trading
A person can buy ETFs on margin, trade using the standard orders used on the market, and use hedging strategies. A regular ETF trader finds that the ability to act proactively during the trading day gives them much more opportunity to achieve gains when they are presented.
Short selling, margin trading, and leverage are the best three ETF advantages mostly beneficial for active traders.
7. Transparency and daily portfolio disclosure
Whether there is active trading or not, the trader is provided with transparent portfolios that allow them to check their trades on a daily basis. ETFs have an advantage that the fund manager posts the details of the previous trading day on their website.
So any person can see the trading that has conducted each day on the website. The website also identifies the weight of the securities and other assets held by the fund.
Exchange traded funds are set up deliberately to operate this way because they’ve tied their net asset values — which are determined during the trading day — to the assets underlying the fund.
This gives a very good transparency to any exchange traded fund, because the fund itself is designed to replicate the holdings that are contained in the index that it is tracking and is tied to.
This ETF advantage is the biggest win over over Mutual funds – a short term investor can easily base his decision on the securities held by his investment product.
8. No Minimum investment required
The minimum investment required for most mutual funds is not present with ETFs. A person may begin trading with a minimal amount of money. However, most investors find that if they are going to do active trading, they want to diversity their sectors and have resources allocated evenly to cushion any losses in one sector.
Not everyone has thousands of dollars to invest. For beginners or small time investors, this is one of the biggest ETF advantages.
9. Day trading
Some traders work daily on their ETF trading, these day traders make several trades during the course of the day. They often are acting on immediate trends in the market.
Studies of trading activities have shown that day traders on the ETF do not make the consistent successful gains of more calculated traders. Using a system and strategy when one is going to start ETF trading will provide more beneficial over the long term.
A lot of other ETF advantages mentioned above get together to create this major ETF advantage over Mutual Funds. Since ETFs are traded all day long, a day trader can buy and close his position on the same day.
Instead of doing all this by yourself, if you prefer an automated advisory solution like robo advisor that does this automatically for you, you can read the following article.
Advantages of robo advisors. Why robo advisors are bad? Learn Robo advisor Pros and cons. Are Robo advisors profitable? Learn why not to use a robo advisor?
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