Millions of investors have been pulling their money out of traditional mutual funds and moving it to exchange traded funds. Investors everywhere are discovering the many benefits of exchange traded funds, and they are voting with their wallets. If you have not yet made the switch, just consider some of the many benefits of exchange traded funds.
1 – They Are Low Cost
You can lose 1% or more of your mutual fund return to fees and expenses, and the compounding effect makes the cost even higher. Exchange traded funds are generally much lower in cost, as little as one tenth the expense ratio. Over time, those lower costs can benefit you even more. Every dollar you save on mutual fund expenses is one more dollar you have to invest, and the magic of compounding can help you accumulate much more wealth.
2 – They Are Diversified
Building a diversified portfolio is essential to investment success. When you buy a single stock, you run the risk that its price could fall to zero. When you buy hundreds or thousands of stocks, the failure of a single company has an almost negligible impact on your overall performance. Buying an ETF is perhaps the best way to diversify your holdings. Simply buying a Standard & Poors 500 ETF gives you instant ownership of 500 different stocks. Buying a total stock market ETF gives you thousands more, further reducing your risk.
3 – They Are Easy to Buy
It is easier than ever to buy an ETF. Discount and online brokerage firms offer access to a wide variety of ETFs, from widely-diversified indexes to specialty funds. Opening an account with a discount broker is a great way to keep your costs low and your portfolio diversified. Even better, some brokerage firms offer free trading for ETFs, so you may not have to pay a penny to buy and sell your favorite funds. Many brokers also reinvest your dividends and capital gains for free, allowing you to buy more shares at no additional cost.
4 – They Serve a Wide Variety of Needs
The first exchange traded funds tracked popular index like the Standard & Poors 500 and the Dow Jones Industrial Average, but these days you can find an ETF that tracks virtually anything. Whether you want to invest in gold and silver, make money in commodities or buy the stocks of emerging countries, you can find an ETF that will do it.
5 – You Can Buy Low and Sell High
Buying low and selling high is a key concept in stock market investing, but that can be difficult to do with mutual funds. When you buy a mutual fund, you do so at the closing price on the day of the purchase, but it is impossible to know that price in advance. When you buy an ETF, you can set a limit order to purchase at a specific price. You can do the same when you sell, locking in a profit if the shares reach your target price.
If you think the market is primed for a fall, you can set a limit price 10% lower than the current level. If you are right, the shares are yours and you can enjoy the profits if the stock market goes back up.