An Exchange Traded Fund (ETF) is essentially a marketable security that tracks different types of stocks, bonds, commodities or even a basket of assets. ETFs are typically traded the same way common stock is traded on the stock exchange. These investment assets fluctuate in their value throughout the day due to the fact that they are bought and sold continuously.
Often, then novice investors picture any stock market investment, they picture dramatic outcomes like stocks rising or falling exponentially, which contributes to a general fear when it comes to these investments. However, problem with thinking this way lies in the fact that stock based investments like ETFs are not meant to yield quick results overnight (though some may do). Investors who prescribe to the notion of ‘buy and hold’ are the ideal audience for ETFs.
This is because buying low cost global ETFs and holding them for long periods can result in consistent growth and returns in the long run. If your main aim with your investment is to grow your wealth for the future (as opposed to growing your wealth for a set goal in the near-future), then ETFs are the right form of investment for you.
Why should you buy low cost global ETFs?
There are many reasons why investors all over the world favour low cost global ETFs. Some of these include the following:
Investors are continually on the lookout for opportunities to save money, in order to further invest and grow their wealth. ETFs are a form of investment that offer great saving potential for investors due to the fact that each trade only has a single transaction. This means that investors do not have to burn a hole in their earnings by paying multiple commission fees.
Furthermore, when compared with mutual funds, ETFs offer much lower costs. In general, mutual fund fees can range from 0.1% to more than 10%. However, ETF expense ratios typically range from 1.10% – 1.25%, making them a much cheaper option. Investors who are young and just embarking on their investment journey can benefit greatly from this difference.
Easier risk management:
More often than not, ETFs offer swaps, options, and futures contracts, which minimize the losses (or the risk of the same) that an investor can incur quite significantly. Some funds also offer the flexibility of trading ETF volatility with option straddles, and investors can gain from doing so as well.
However, before you invest in an ETF, it is essential to understand that there are a few futures and options in ETFs too and you must evaluate what that means for your investment before putting your eggs in that basket.
Due to the structure of ETF trades, the capital gains taxes associated with this investment are far lower than the taxes for mutual funds. When mutual fund trades or index trades lead to gains realisation, taxes are applied to the gains immediately. However, this does not happen with ETFs.
The capitals gains taxes for ETFs are only incurred once the assets and the entire fund is sold together.
ETFs are traded the same way stocks are traded in the exchange market. This means that ETFs are traded throughout market hours. They can be sold on margin or sold short, and prices are updated throughout various points in the day. This offers investors a great range of flexibility when it comes to buying or selling ETFs as per their own convenience.
Ease of passive management:
Another significant benefit for novice investors is that ETFs do not need to be aggressively managed in order for them to perform well. Typically, ETFs follow specific benchmarks or indexes so only a few minor adjustments can suffice while investing in them. As a result, investors can enjoy lower management fees and lower risks as well. This makes this form of investment ideal for people with less experience in growing their wealth.
High scope for diversification:
Whether you are new to the world of investing or have been growing your wealth for a while now, you’ve probably heard of the importance of diversifying your portfolio. ETFs offer a high scope for the same as they cover almost every prominent index like Nasdaq, S&P, and Dow Jones). Furthermore, they also cover various sectors of the equities market, including small caps, large caps, growth, and value.
Apart from this, investors can also pick region-specific ETFs such as those pertaining to the Pacific Rim or emerging markets. You can also select industry specific ETFs like gold, biotech, technology, energy and so on. Market niches such as gold and REIT are also available. Thus, there is a very high scope for diversifying the portfolio even if you only stick to ETFs as your main form of investments.
How can you trade ETFs?
You can trade ETFs with the help of online brokers as well as traditional brokers and dealers. By getting in touch with a professional, you can learn more about the ETFs that suit your budget as well as your goals for investment. This can help you make more astute decisions while picking the right fund for your needs. Do keep in mind that both, online and traditional brokers charge commissions for their services and you must add them to your calculations while estimating the investment amount that you are comfortable with. This way, you won’t be in for any rude surprises down the line!
Beginner investors stand to gain a lot from investing their funds in ETFs. The buy and hold strategy that is generally recommended for ETFs can ensure that any risks incurred level out as time goes on. Due to this, and the high ROIs that they can earn, most investors prefer blue chip funds for such investments. However, you do not have to start with those and can opt for a low cost global ETF instead to begin your journey. Once you are more familiar with the process of investing in ETFs, you can look into bigger investments.