Home Business Why Trade ETF’s? Here are Five Reasons

Why Trade ETF’s? Here are Five Reasons

In recent years, Exchange Traded Funds (ETF’s) have significantly gained in popularity as an investment option. Both companies and individual investors have turned to this because of the benefits they offer.

ETF’s work like an investment vehicle that holds a group of assets such as stocks, commodities, and bonds. They are traded at any time stocks are trading.

The investor gets interested in all the fund’s holdings by buying a share.

Trading ETFs, however, doesn’t come without its fair share of risks. This raises the question, ‘Why trade ETF’s?’

Below, we look into five reasons why you should trade in ETF’s.

Take a look.

Why Trade ETF’s

1. Easy to manage trades

One of the best things about exchange-traded funds is that they are easy to trade. Unlike mutual trades that are traded once a day, ETF’s trade throughout the day.

As such, investors have more extensive control over the buying and selling price of their investments. It also allows you to use features to protect your money in a trade such as the stop-loss order.

Moreover, speculative traders get the ability to place short term trade during the day based on the direction of the market.
What’s more, the risks involved in ETF trading is diversified and thus much lower than other forms of trading.

2. More diversification

There are hundreds of ETFs trading in the stock market, and so, investors gain access to the broad market.

Investing in ETFs means that your money is spread across different types of investments like bonds, currencies, and commodities. This allows you to diversify your investments and thus reduce risks.

More diversification also exposes you to more opportunities for return. It also protects you from the aggressive market cycles, while still granting you the upper hand in a bullish market.

3. Tax-friendly Investment

Among the many reasons why ETFs are popular is their tax efficiency. Since ETFs are passively managed funds, they don’t generate large capital liable for too much taxation as mutual funds.

However, like mutual funds, ETF’s taxation is based on the long-term capital gains rate.

Another reason why this investment is more tax-efficient is because of how new shares are created and redeemed. This is because, since ETFs are indexed, they are taxed only when they fall out of positions.

Nevertheless, since there are fewer selling and buying of stocks, they rarely move out of position to create capital gains. As such, taxation is minimal.

4. They are cost-effective

ETFs are among the best investments you can try on a budget. This is because, with ETFs, you don’t have to worry about exit fees and other management fees. Although they don’t are charged based on the broker fees, they are still cheaper than mutual funds.

They also have a lower managerial index ratio compared to mutual funds. The lower ETF funds translate to more value on your investment.
Moreover, ETFs trade like stocks, and thus, you can benefit from the position sizing and purchase them in small amounts. For a single share, you can get yourself an ETF!

5. Transparency

In investments, getting more information about your fund manager and holdings is crucial. It helps you understand that your investment is in safe hands.

Unlike mutual investments, ETFs post their holdings daily. This way, you can get to know the positioning of your ETF and its weighting in the funds.

Knowing this information helps you determine whether your ETF is meeting its objectives, and to assess its current market price. Consequently, you’re able to make a better decision regarding your investments.

Conclusion

Although there are many investment opportunities in the financial market, ETFs are a great investment opportunity. They are not only easy to own but are also easy to manage, offer more diversification, and cost little in terms of taxes incurred. However, they also come with several disadvantages. For one, they can be more expensive than direct investment. They are also less transparent than direct investment.

Nonetheless, ETFs are a good investment, and the benefits outweigh the disadvantages. When looking to invest, remember that ETFs are always a great opportunity.

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