Exchange-Traded Funds (ETF) are a great option for investors to improve their investment strategy due to the fact that ETFs can offer lower operating costs than traditional mutual funds, more flexible trading options, greater transparency, and better tax efficiency in taxable accounts.
Overall, ETF’s offer the ease of stock trading with the diversification benefits of mutual funds. Investors have flocked to ETFs because of their simplicity, relative affordability, and access to a diversified product. These funds offer the diversification, transparency, and tax benefits that most investors need in their portfolios. There are a variety of ways to invest in ETFs, and how you do so largely comes down to your short and long-term financial goals and your current financial situation.
Why ETF’s Are A Great Investment Option
ETFs have several advantages over traditional mutual funds. The 4 most important advantages include:
Flexibility
Traditional mutual fund shares are traded only once per day. ETF’s, on the other hand, are bought and sold throughout the day while the market is open. Share prices vary throughout the day, based mainly on the changing intraday value of the underlying assets in the fund. ETF investors know within moments how much they paid to buy shares and how much they received after selling. The instant trading ability of ETF’s makes portfolio management much easier by making it simple to move money between asset classes based on the demands of the market and needs of the portfolio itself.
Diversification
ETF shares may be able to provide an investor easy exposure to a specific desired market segment given the wide variety of sector, style, industry, and country categories available. along with the flexibility to enact the trade as needed. In certain situations, an investor may have a significant risk in a particular sector but cannot diversify that risk because of restrictions or taxes. In that case, the person can short an industry-sector ETF or buy an ETF that shorts an industry for them.
Tax Benefits
The primary tax advantage of ETFs compared to mutual funds – Mutual funds typically distribute capital gains to the shareholders annually. . ETFs, on the other hand, have a different internal structure and how the shares are created or redeemed. This structure produces lower capital gains and the capital gains that the investor has in their account are payable only upon sale of the ETF.
Costs
Regardless of their individual structure, all managed funds incur operating expenses. ETF operation costs can be streamlined compared to mutual funds. Lower costs are a result of client service–related expenses being passed on to the brokerage firms that hold the exchange-traded securities in customer accounts. Importantly, ETF companies have lower overhead, and at least part of that savings is passed on to individual investors in the form of lower fund expenses.
Overall, ETF’s are a strategic option that, based on your goals, can serve as an avenue to diversify assets and reduce overall costs.
Work With Inflection Advisors
Reach out to an advisor today to get more information about exchange traded funds. Inflection Advisors is here to help through the process. Contact us today by phone at (424) 372-8399 or reach out through our website.
