When it comes to the topic of contemporary investment, it’s easy to feel overwhelmed by choice. These days, you can invest in everything from stocks to fine art. But only some options are worth the risk.
Due to their transparency, versatility, and low cost, ETFs are becoming an increasingly popular investment choice for people and companies across the globe. In fact, in September 2022, EFT popularity set a new record with more than 3,000 ETFs trading simultaneously.
Let’s explore the various functions of ETFs, as well as the many benefits that triggered their widespread investment.
Breaking down ETFs
Before we jump into the many benefits of investing in ETFs, let’s run through what exactly they are. ETF stands for Exchange-Traded Fund—a type of pooled investment that tracks a particular sector, index, bond, commodity, or other kind of asset.
ETFs operate in a similar manner to mutual funds. Except, they come with the added benefit of being available for purchase on a regular stock exchange.
Unlike mutual funds (and many other types of investment choices), ETFs can be programmed to track just about anything from the cost of a diverse assortment of securities down to specific, individual commodities. They can even track targeted investment strategies.
ETFs represent an opportunity to gain access to a broader variety of securities while still working within a limited budget, making them popular choices for first-time or low budget investors.
The Benefits of Investing in ETFs
There’s a reason why CNBC lists ETFs as the fastest-growing trend in investment right now. Well, actually, there are several. This uniquely designed investment choice is easy to obtain, doesn’t cost a lot to invest in, and can be exponentially diversified.
Let’s take a look at six of the biggest benefits of investing in ETFs and how they can support new and experienced investors in increasing their wealth in the long haul.
1. Diversification
Diversification is one of the most notable characteristics of an ETF investment. When you invest in an ETF, you have the option to invest in hundreds, or even thousands, of trades—and they can be as different as you like. Bonds, Bitcoin, gold, property, stocks—they’re all investable through an ETF.
If you’re someone who’s looking to diversify their portfolio, ETFs are a great place to start because you can access a wider variety of investments in one go.
Using ETFs as the foundation of your portfolio, you can accumulate assets across a broader spectrum of asset geographies and classes. All without the risk of having to choose individual bonds or stocks.
2. Low cost
ETFs are one of the most cost-effective investment choices on the market. When you invest in ETFs, you only pay one baseline brokerage fee, regardless of how many shares you buy.
Compared to other investment options that require a brokerage fee for each individual share, this means a significant amount of money can be saved. If you are working with a limited budget but want to make the most out of what you’ve got, ETFs are likely the best investment choice.
Another layer of cost efficiency that comes with ETFs relates to the fees charged by the respective ETF provider which cover the operational costs. To the great benefit of investors, you can now purchase ETF shares with an OER rate as low as 0.07%, or less.
3. Liquidity
Liquidity refers to realistically tangible cash, something relatively elusive with your typical investment options like property or collectable items. But unlike your average low-liquidity investment, ETFs can be traded throughout the day for quick, liquidated profit.
In contrast, an investment in a house that sells would require much more time and paper-trailing before the liquid cash became accessible, making it a far less practical choice for someone looking for a fast turnaround. When it comes to liquidity, ETFs are as reliable as they come.
This aspect of ETFs makes them a particularly useful tool for investors who prefer to move swiftly in and out of specific markets. A trend that’s becoming increasingly popular amongst today’s investors.
4. Transparency
With ETFs, there’s no confusion or unpredictability around what you’re buying. ETFs typically disclose their holdings every 24 hours. So, you know exactly what is making a profit and at what price. Even semi-transparent ETFs allow full portfolio access to investors on a monthly or quarterly basis.
For example, if you wanted to avoid investment in oil, you could spot any related oil activity far faster and easier than if you were investing in a mutual fund. In the case of a mutual fund, you’d be unable to access that kind of specific information. ETFs allow for more visibility and control over investment patterns.
5. Accessibility
One of the most attractive qualities of buying and selling ETFs is how financially accessible they are. Unlike with other investment choices, you don’t need an already developed portfolio or millions to back it up. You can start with just a few hundred and top it up from there.
6. Tax Benefits
ETFs come with major tax advantages. Unlike a mutual fund, ETF investment doesn’t require the payment of capital tax gains, which can be a huge drain on profit.
This is because with ETFs, asset trades happen much less frequently than with mutual fund investments. Mutual funds are constantly trading and selling assets, which leads to inflated capital tax gains. Whereas ETFs only incur capital tax gains on the rare occasion that an investment is sold to another buyer.
Mutual fund traders get exposed to a much higher rate of turnover activity, which causes them to accumulate more tax debt. Ultimately, investing in ETFs means you will pay much less tax overall than you would with other investment types.
An Accessible Investment Option
Just like all other investment choices, ETFs are not magic wands that guarantee financial success. However, the diverse structural elements of ETFs make them one of the more accessible and practical investment options, which certainly increases your chances of seeing a high profit.