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Benefits of using Exchange Traded Funds


ETFs offer a number of potential benefits that can make them extremely effective for helping investors reach specific long-term goals:

  • Diversification
  • Low fees and no sales load
  • Intraday liquidity
  • Tax efficiency
  • Transparency—and much more

ETFs come in every style and asset class in the investment rainbow. They can help investors generate income, achieve long-term growth, gain more complete diversification—and much more.


As the table below illustrates, ETFs offer a number of benefits that can make them extremely effective in helping investors reach specific long-term goals. Additionally, as with mutual funds, ETFs come in every style and asset class in the investment rainbow. They can be used to complement mutual funds in an existing asset allocation, to replace mutual funds—or for an entire portfolio.

  Exchange-Traded Funds Mutual Funds
Bought and Sold On an exchange throughout the day Through the mutual fund companies
Sales Charges None, though ordinary brokerage commissions apply May have sales loads, purchase and/or redemption fees
Minimum Investments None, an investor can buy one share May have high minimum investments
Expense Ratios Traditionally low Dependent on Management styles
Liquidity Intraday End of the day
Trading
  • Ability to trade intraday
  • Special trading orders are possible:

    -Market: ETF shares are bought or sold at the market’s current price at the time of execution
    -Stop: sets a specific price at which an ETF is to be purchased or sold
    -Limit: sets the maximum and minimum price, respectively, at which you are willing to buy or sell shares of an ETF
    -Short selling: borrowing ETF shares to sell now in the hopes of buying them back more inexpensively later and profit from the difference
    -Margin trading: taking out a loan to buy ETF shares, or using ETF shares as collateral in an effort to leverage your existing portfolio beyond your initial investment

  • Trades only executed once per day
  • Special trading not possible
  • Trading frequency restricted
Consequences of purchases and sales
Security prices
Tax implications
Purchases and sales of shares on the secondary market generally:

 

  • Do not affect security prices
  • Do not impact tax efficiency
  • Do not trigger capital gains or losses on the underlying securities
Purchases and redemptions of a large number of shares can:

 

  • Impact the underlying security prices as the fund buys or sells shares
  • Impact the fund’s NAV and returns
  • Trigger capital gains or losses on the underlying securities
  • Affect the fund’s tax efficiency
Transparency Fund holdings published daily Fund holdings typically published quarterly
Portfolio Investments Assets are typically fully invested as there is no need to hold cash aside for redemptions Mutual funds typically hold at least 5% of their assets in cash in order to handle day-to-day redemptions

 

 
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Comment   |  6 years, 4 months ago from Appleton, WI