The Advantages of Investing in ETFs

by Rose Johnson

An exchange traded fund (ETF) is a type of investment that holds various types of securities, such as stocks, bonds, real estate and commodities. The popularity of ETFs increased in recent years, making them an attractive investment option for small and large investors. ETFs offer several advantages to investors, which include low cost and the ability to diversify assets. Although there are some risks associated with investing in ETFs, many investors choose to add ETFs to their investment portfolios because of the many benefits they offer.

Diversification

ETFs operate similarly to mutual funds by investing in various securities, which make it possible for investors to easily diversify their assets. Diversification is important in investing because it reduces your risks. Instead of buying individual stocks and bonds, you can invest in an ETF that allocates its holdings in many different asset classes. You can purchase an ETF that holds assets in a particular sector, region, market segment or that follows a particular index, such as the Wilshire 5000.

Low Costs

ETFs typically charge lower fees than similar investments, which many investors find beneficial. Most ETFs do not charge annual expenses, which allow investors to reinvest the money saved. The expense ratios of ETFs are very low, with some as low as 0.10 percent. The cost to initially invest in an ETF is lower than similar investments. Unlike mutual funds, there are no minimum requirements to invest in ETFs other than the cost of one share. This allows small investors to invest in ETFs with little money.

Liquidity

ETFs are very liquid because they sell like stocks, meaning you can easily convert them into cash. Unlike a mutual fund that sells once the NAV is calculated for the day, investors can buy and sell ETFs throughout the day. This is a major advantage for investors looking to buy or sell ETFs quickly to capitalize on current share prices. According to William Artzberger of "Forbes," although an ETF offers more liquidity than a mutual fund, the liquidity of an ETF is based on the liquidity of its underlying assets. For example, an investor is more likely to easily buy or sell an ETF that holds stocks that are extremely liquid.

Access to Alternative Investments

In the past, investors could not access or did not possess the financial ability to invest in some alternative assets. However, ETFs now make investing in alternative assets possible for many investors. Instead of buying gold bullion, silver coins or oil wells, an investor can purchase ETFs that invest in these three commodities. ETFs also give an investor the ability to purchase stocks in foreign markets. Instead of buying stocks in one particular country, you can invest in an ETF that contains asset holdings from several emerging countries, such as Brazil, India and China.

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