Here’s How ETFs Can Benefit Your Portfolio

04-14-etfsI recently wrote a article about ETF Basics. In that post I explained what Exchange Traded Funds (ETFs) are and what has been so appealing to investors. I want to go a little farther and discuss more ways ETFs can benefit your portfolio. Investors who take advantage of ETFs and include them as a part of their investment strategy will reap many of these benefits.

1. Low Expenses
When you buy an ETF, you are buying an entire index or basket of securities at one time. This allows you to buy sometimes hundreds of securities with one purchase and not multiple trades. In addition, there aren’t any sales loads with mutual funds, and management fees tend to be lower because there is not any trading costs.

2. Taxes
Sometimes when you buy a mutual fund there are capital gains already embedded at the time of purchase. Some investors have bought funds and lost money during the year, and actually get a capital gain from the manager selling securities to meet redemptions. With ETFs there are no capital gains until sold.

3. Flexibility
ETFs trade throughout the day just like a stock. You can actually sell short on margin, and prices are continuously updated during the trading day. This allows you a great deal of flexibility if you need to sell something immediately.

4. Transparency
Mutual funds are notorious for trying to keep their complete list of holding secret. Particularly if it is a successful fund and other fund companies are trying to poach some good trades. ETFs on the other hand, are completely transparent. You know exactly what you own.

5. Derivatives
Many ETFs list options and futures contracts. Some use commodities as well. These are great tools for managing risk in your portfolio. This will allow you to hedge your portfolio with puts and calls. Some ETFs will have that flexibility.

6. Passive Management
ETFs are meant to represent a particular index such as the S&P 500 or the Russell 2000. They are supposed to also track the performance of these indexes, but not outperform them. This is opposed to a fund that has a manager aggressively looking for higher returns. By using the ETF you lower your risk and management fees as well.

7. Immediate Dividends
Most ETFs dividends are immediately reinvested back into the fund. With traditional mutual funds, there may be a delay. This allows those funds to immediately start helping increase returns or shore up losses.

8. Simplicity
I’ve written about investment simplicity before. ETFs are very simple in structure and very easy to understand. I think sometimes investors tend to try to complicate them more. For example, if you want to buy a technology index, you just buy the ETF that represents that index.

If you have been using traditional mutual funds for years, you may find ETFs an interesting alternative. There are some distinct advantages to using ETFs in your portfolio. If you would like to explore ETFs for your portfolio, write me at david@lexwealth.com or call me at (859) 225-2596.