- ETF Investing
The number and variety of ETFs is exploding as investors discover and embrace the advantages of ETF investing. An ETF is a basket of stocks similar to a mutual fund, but trade like a stock. The advantages of ETF investing, and the available variety, are leading many investors to abandon mutual funds and maintain an ETF only or an ETF and stock portfolio. The AAAMP uses both ETFs and stocks, but not mutual funds, in its investment portfolio.
ETF Investing Advantages
These are the reasons investors are embracing ETF investing:
Low Costs – Since ETFs trade like stocks, you can buy a diversified portfolio with the same low commission (typically $6 – $10) as a stock. Also, ETFs typically have lower expense ratios than mutual funds.
Instant Diversification – There are now hundreds of ETFs trading on U.S. Stock exchanges. The variety is deep and wide, covering all major indices, sectors, industries, sizes (large cap, mid-cap, small-cap, micro-cap, etc.), strategies (growth, value, etc.), international regions, specific countries, and even includes exotic ETFs (commodities, short or bear funds, etc.).
There are also many ETFs in the fixed income area. Bond ETFs include different terms (long, mid, short, etc.), various quality (treasury, corporate, high-yield, etc.) and regions (United States, individual countries, emerging markets, etc.).
Liquidity – ETFs trade on a market exchange so they can be traded (intraday) anytime stocks trade, not just at the end of the day. This can be an important benefit because volatility has been very high the past few years.
Tax Efficient – Since most ETFs are not actively managed, but are programmed to follow a specific index, they don’t have realized capital gains and income that are required to be passed on to owners each year. This means investors won’t be taxed until they sell the ETF; giving them more control.
Sector Investing – ETFs can segment to very specific or targeted sectors of the economy. This allows investors to have a diversified position in a small slice of a sector they want exposure to.
Purchased in Small Amounts – Since ETFs trade like stocks, small positions can be purchased (no minimum investment) to dollar cost average into a larger position, or to take a single small position in a particular sector.
Available in Alternative Investments – ETFs allow investors to take positions in alternative or even exotic investments that are unavailable in any other form to small investors. New products become available regularly and already include ETFs in commodities, hedges, and leveraged short positions in indices and sectors.
ETF investing can improve risk management and portfolio optimization through segmentation and increased diversification at a low cost. These ETF advantages are driving investment capital to this important investment vehicle.
| AAAMP Blog by Ken Faulkenberry | |
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Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record. |
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