If you want to diversify your investment portfolio, you may want to consider ETFs. Exchange Traded Funds have become a popular option for investors over recent years for a number of reasons. But what exactly are and what are the advantages of investing in them?
If you want to find out more about ETFs and what they involve, here is a quick guide to help you make a decision on whether you want to invest in them or not.
An Overview
Exchange Traded Funds first appeared in the 1980s, but have become much more popular over the past decade. They track indexes such as the Dow Jones and the S&P 500. You can also invest in FTSE ETF portfolios, and whenever you buy shares in one of these you are investing in a portfolio that tracks the index that it is linked to.
There are other types of index funds, but ETFs are different from these in one important respect. Instead of trying to outperform the index that they are tracking, they mirror the performance of the index.
ETFs Are Flexible
ETFs are popular for many reasons, one being that they are considered to be quite flexible when compared to other investments. They trade like stocks, and as a result they are traded continuously throughout the day, and prices change considerably as well, making them different from other funds that are priced after the markets have closed.
Their value is based on the index that they are tracking, and as a result they also benefit from having a wider diversification compared to holding shares in a single company. They tend to trade at higher volumes than individual stocks, and this leads to liquidity, which helps to lessen risk for investors.
Cost Benefits
The cost benefits of ETFs also help to make them popular with investors. Because they track an index and do not try to beat it, they incur lower administrative costs than a managed portfolio, and traditional funds tend to have higher annual expenses. However, investors do have to pay a commission to trade in the shares, and this is one of the things to remember if you do decide to invest in ETFs.
Passive Management: A Key Advantage of ETFs
Passive management is one of the main advantages of ETFs. With ETFs there tend to be fewer adjustments made when compared to a fund that is outperform the index that it is linked to. Because they are only trying to mirror the performance of the index, risk is lowered as a result, and management fees also tend to be lower than mutual funds.
Consider Investing in EFTs
ETFs can be attractive to investors for many reasons. If you would like to start investing, make sure you seek professional financial advice to ensure that it is the right decision for you. There are certainly a number of potential benefits in choosing to invest in ETFs, but it is always a good idea to seek professional advice before making any decisions.
This is an article by Jim Hadling, who writes widely on investment issues, providing advice and tips on FTSE ETF investments as well as other investments.
Jim, great information on ETF’s. As a private professional money manager I regularly use ETFs in both my active and passive strategies. As their popularity has gained, the number and selection has grown substantially. For instance, there are even ETFs that allow someone to short Japanese government bonds or invest in small emerging market countries!