ETF Investing Advice
- Investors pay management fees when investing in professionally managed investment funds. Management fees charged by ETFs are the lowest compared to other funds, including mutual funds, private equity funds and hedge funds, primarily because of the passive investment nature of an ETF's index investing. While ETF managers are responsible for choosing, designing and setting an index for their funds to follow, once the component securities in the index are determined, managers do not engage in any active buying and selling of the securities to prevent changing the composite of the fund investments. Managers' only ongoing task is to monitor market conditions and recommend adjustments to the index composition when necessary. Investors, however, pay separate trade commissions to their brokers when buying and selling ETF shares.
- Investing in ETFs can potentially reduce the number of taxable transactions, particularly when compared to mutual fund investing. First, actively managed mutual funds engage in frequent buying and selling funds' underlying securities, triggering potential taxable capital gains. Second, all mutual funds must sell some of their portfolio holdings whenever investors request fund share redemption, but any resulting capital gains are distributed proportionally to all shareholders. ETF investors are subject to potential capital gains only when they, themselves, sell ETF shares to other investors on an exchange.
- Because ETF shares are traded like stocks on an exchange, investors can buy and sell fund shares anytime during trading hours. By comparison, mutual fund investors can buy new shares or redeem existing shares only once at the end of a trading day when the net asset value of a fund's underlying securities can be determined for the day. Moreover, transaction time for ETFs is much less than that for mutual funds, as ETF investors trade through brokers, and mutual fund investors make share exchanges directly with fund companies.
- Even though ETFs have a stated net asset of value, as measured by the collective value of the underlying securities in fund holdings, prices of ETF shares are also influenced by market force of supply and demand. Over time, ETF shares may be traded above net asset value for a premium or below net asset value for a discount, resulting in potential trading gains and losses. It's up to individual investors to take advantage of such market conditions.
- Providing certain competitive advantages as a unique type of investment fund, ETFs can be used in a wide range of investment asset classes and categories from stocks and bonds to oil and gold futures. For investors who believe in diversification, ETFs provide a convenient and efficient way to diversify their portfolios. Within each asset class, e.g., stock, an ETF may hold a collection of investments that include companies of different market capitalization and stocks both value based and growth oriented.