Most investors still don’t know about Exchange Traded Funds (or ETFs) and their advantages over traditional mutual funds. Even many seasoned investors are still clamoring over which one to go with. Lets take a look at Exchange Traded Funds, their history, performance and advantages. This will give you a better understanding of how much better ETFs are than mutual funds
ETF 101: A Quick Look
Exchange Traded Funds can most accurately be described as the happy marriage of a stock with a mutual fund.
Like mutual funds, when an investor buys an ETF, he is buying a pool of securities at one time. For instance, an ETF known as DIA, or “Diamonds.” allows the investor to take a position in the Dow Jones Industrial Average.
Like a stock, an ETF can be purchased through a brokerage account, can be traded throughout the day, can be bought on margin and offers stock-like trading features such as limit orders, stop orders and short selling.
ETFs come in many different flavors. They track all the major indexes like the Dow, S&P 500, NASDAQ 100, Russell 2000 and others. They’re also available in a number of different sectors, many of which are hot at some point so it is your job to keep an eye out. Investors who want to trade sectors like energy, technology, precious metals, financial, health care, emerging markets, interest rates, real estate and many more have the ability to do this.
Introduced over 17 years ago, ETFs were initially mostly used by professional traders, but in recent years, have experienced rapid growth as a popular investment vehicle with public investors. Now everyone is trading them, including investors on all scales of the financial spectrum.
ETFs have gained such widespread acceptance and popularity because they provide significant advantages over mutual funds. The advantages of ETFs over mutual funds include:
- Continuous pricing throughout the day compared to end-of-day pricing for mutual funds
- Can be sold short like a stock, which isn’t possible with mutual funds
- Can be bought on margin
- Can use limit and stop orders so you can exit or enter during the trading day
- Have lower expenses than mutual funds and no management fees
Adding it all up, it’s easy to see why Exchange Traded Funds have been growing at a rate of nearly 50% per year since 1993. This is pretty rapid growth, and will continue at a rate close to this for the foreseeable future.
Conclusion
It’s easy to see why Exchange Traded Funds have steadily grown in popularity over the last seventeen years. By combining the benefits of a mutual fund with the benefits of a stock, they really do offer investors an optimum combination of flexibility and potential profit.
Of course, the large mutual fund companies don’t like ETFs but have had to adjust to their new popularity and so many fund families have introduced ETFs of their own in recent years.
For investors, ETFs offer considerable advantages of flexibility, cost and diversity, and therefore, this makes them a clear choice over mutual funds. Do some research and get yourself invested in ETFs today!