Top five advantages of ETFs

Exchange-traded funds, also called ETFs, have grown in popularity in recent years. There are good reasons for this. Regardless of the strategy we want to implement for our investment portfolio, we can probably add ETFs wisely to our arsenal of tools.

The five main advantages that ETFs offer us are low cost, fiscal efficiency, diversification, versatility, and transparency.

• Low cost

With the popularization of passive investment strategies, the cost of the vehicle we choose to invest in has become very important. If we consider two investments that rent the same, clearly the one with the lowest commissions will be the best option. Thus, if what we seek is to replicate the profitability of indices, the cost we incur to do so is a key factor that directly affects our final profitability.

The costs and fees of ETFs are generally significantly lower than those of traditional funds. There are also no subscription or reimbursement costs, as they may have some funds, although we will have to assume the purchase and sale costs and custody commissions with some exceptions. All this means that the costs of ETFs are generally lower than those of traditional funds. Many investors who follow passive investment strategies have seen in ETFs the appropriate vehicle to implement their strategy.

• Fiscal efficiency

It is often thought that taxation for us as investors is better in traditional funds since we can transfer our shares from one fund to another without paying taxes on latent capital gains. To a large extent, this tax advantage is very important, and we must consider it seriously when selecting whether we prefer traditional funds to invest through ETFs.

However, ETFs tend to incur less tax in their internal workings. Partly because they tend to have lower asset turnover than traditional actively managed funds. Also partly because of the way they are structured and where they establish their tax residence. All this means that the ETF can be considered a fairly efficient vehicle from a tax point of view. If we plan to invest for the long term and not make excessive purchases and sales, the ETF can be a very good option for our portfolio.

• Diversification

Undoubtedly one of the greatest advantages that ETFs offer is the ability to obtain enormous diversification. In fact, with a single ETF, we can invest in indices that replicate world equities, such as those that replicate the MSCI World Index. Not only can we achieve this impressive diversification with a few products, but we also have tools to invest in assets that were previously not easily available to all investors.

• Versatility

ETFs are traded continuously throughout the trading session. They are bought and sold just like any other stock on the stock market. Thanks to its liquidity and structure, prices fluctuate in relation to the evolution of the assets and indices they replicate. It is also possible to take short positions in many of the ETFs, just as it can be done with any stock of a company. This allows us to configure tailored strategies, and better manage the risk of our portfolio.

• Transparency 

The transparency of ETFs is much greater than that of traditional mutual funds since ETFs are required by law to communicate their positions on a daily basis. In traditional funds, the regulatory body only requires a public statement of positions each quarter. Therefore, we can always know what assets we are investing in when we buy an ETF. For this reason, ETFs are a perfect tool to replicate indices and carry out passive investment strategies. Active fund managers logically prefer to use traditional funds where they can maintain more discretion over their positions and investment strategy.

Are you now interested to play on ETFs? We suggest you to visit https://sijoitusrahastot.org/etf/.

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)