Advantage of investing in Exchange Traded Funds and why are ETFs safe investments!
In this era of financial meltdowns and global economic uncertainty, there is no foolproof investment option anymore. The financial crisis is not limited to any specific industry or segment. Some of the well-known large corporations in the US like General Motors have had to consider bankruptcy options in the past.
Although there is no one size fits all advise for investors but one of safest things as an investor is to have a diversified portfolio. Remember the saying, never put all your eggs in one basket? The same goes true for investment as well. A well-diversified portfolio not only balances out the risk in these uncertain times but can also bring a sense of balance.
Some of the most well known investors keep a balanced portfolio by considering investment in mutual funds and exchange traded funds (ETFs) rather than trading individual company stocks or hunt for the magical penny stock.
Exchange Traded Funds (ETFs): In the simplest terms, Exchange Traded Funds or ETFs are funds that track market indices like the NASDAQ-100 Index, S&P 500, Dow Jones, etc. Exchange traded funds simply replicate the performance of its underlying index. Rather than buying funds of each individual company on the index, with an ETF an investor buys stocks of a portfolio that tracks the yield and return of its native index. With an exchange-traded fund, the investor can unlock the growth potential of its underlying index.
Why ETFs: Investing in an Exchange traded fund is very simple as investors have the advantage of purchasing ETF shares on margin, short sell shares, or hold for the long term. ETF’s can be used as utility stocks or a long-term investment tool depending on the user and his portfolio. ETFs just like individual company stocks are listed on a stock exchange and are traded throughout the day. ETFs offer investors the flexibility to get in or out of a particular region, sector or asset class depending on the market structure of that region or class.
Low Fee: Comapred to mutual funds and individual company stocks, most exchange-traded funds have lower cost management fees and low fixed transaction costs. Since ETFs are traded throughout the day they offer investors flexibility to move in and move out of the index.
Tax Efficient Investment Tool: One of the most important reasons to consider investing in an ETF is the tax benefits. There are no unexpected capital gains or losses while purchasing an ETF.
Advantages Of Investing In ETFs: Rather than buying different individual stocks on any index, investing in an ETF is a convenient tool to not only balance the portfolio but also save money. Depending on the investor and his individual goal, an ETF can be used to invest conservatively or for short-term growth or even for a more aggressive position.
Although ETFs have been in the market from the 1980’s, they have picked up steam in the past decade. Today there are a number of ETFs offered in the market. ETFs enjoy the benefits of broader diversification than shares in single companies. Since ETF’s have emerged as a popular trading tool for the investors, they trade at higher volumes bringing in high liquidity that enables investors to move in or out with minimum risk and expense.
Overseas Investment Made Easy: As more and more investors from the US look beyond their borders for investment opportunities, many international ETF’s have become a popular investment tool to look beyond the domestic market and into more exciting markets around the world.