EXCHANGE TRADED FUNDS
Ever heard of ETFs?
ETFs are a pre-selected basket of shares that are structured in a way that it trades as a single security. ETFs track an index or track funds secured by a basket of securities that are listed on an exchange, for example a fund manager allows investors to buy or sell securities consisting of the collective basket of shares or index as a single security.
BENEFITS OF ETF TRADING
a. Low Expense Ratios
Everyoneβs aim is to save as much money as possible, particularly investors who take their savings and put them to work in their portfolios. In helping investors save money, ETFs stand out. They offer all of the benefits associated with index funds and they cost less.
b. Diversification ETFβs are more ideal for a diversified portfolio. There are thousands of ETFs available, they cover every major index and sector of the equities market; there are international ETFs, regional ETFs and country-specific ETFs. There are specialized ETFs that cover specific industries and market niches. There are those that cover other asset classes, such as fixed income. ETFs are a convenient way for investors to build a portfolio that meets specific asset allocation needs since asset allocation is perceived as a primary factor responsible for investment returns. The large number of available ETFs enables investors to quickly and easily build a diversified portfolio that meets any asset allocation model.
c. Tax Efficiency Portfolios that ETFs represent are more tax efficient than index funds. The unique structure of ETFs enables investors trading large volumes to receive in-kind redemptions. An investor trading large volumes of ETFs can redeem them for the shares of stocks that the ETFs track. This minimizes tax implications for the investor doing the exchange since the investor can defer most taxes until the investment is sold. Disadvantages of ETFβS That being said, ETFs also have disadvantages. When there is a decline in the prices of the underlying securities, it will in turn affect the price of the ETF. International ETFs bear a foreign exchange risk since the price of the underlying securities is quoted in foreign currency. Also, there may be tracking errors as a result of the fund not exactly replicating the performance of the index in the event of an ETFβ structured on an index.
The push for expanding exchange-traded funds trade comes mostly from professional investors and active traders. Investors interested in passive fund management, and who are making relatively small investments on a regular basis, are best advised to stick with the conventional index mutual fund. The brokerage commissions associated with ETF transactions will make it too expensive for those people in the accumulation phase of the investment.
By;
Tsholo Angel Kopi
