ETF Portfolios: A Reliable Investment?

ETF portfolios have been around for many years. They represent an alternative in investments that you cannot get anywhere else. ETF's are freely available for anyone to trade. While many people have heard of other types of investments, ETF's tend to go a bit under the radar. Here are the basics of how ETF's work and how they can benefit you. 

How it Works

ETF stands for exchange-traded fund. This means that you can trade the fund just like you could a stock on the stock market. The ETF holds different stocks and bonds within it, much like a mutual fund. In order to value an ETF, you add up the net value of the underlying assets and this is what you can expect to trade for it. Therefore, values of ETF's can get very high at times depending on how the assets that it is holding do. Most of these assets are based upon a certain index, such as the S & P 500. 

Advantages of ETF's

  • Low costs- Compared to many other investment options, ETF's typically have lower costs. They are not as actively managed as other funds and they do not have the high fees that other funds tend to charge. When you do not have to pay extra money to invest in something, it adds a lot to the overall performance of the investment. They do not spend as much marketing or selling these assets and the savings gets passed on to the investors.
  • Flexibility- Another huge advantage of ETF's is that they are very flexible. You can freely trade ETF's on the stock exchange at all hours of the day. This presents a definite advantage over similar mutual funds. When you trade mutual funds, you are only allowed to trade them at the end of the trading day. ETF's can be traded throughout the day just like a stock. This presents you with a flexibility that you cannot get from other similar investments. 
  • Tax advantages- Most of the time when you trade ETF's you will generate low capital gains on the year. This means that you will have fewer taxes to pay at tax time. 
  • Diversification- Many investors prefer to invest in mutual funds because it is a low-risk way to diversify their portfolio. With an ETF, you can accomplish the same thing as they are investing in multiple things across an entire index. This makes it a great place to put your cash in between bigger investments.

Verdict

ETF's can be a worthwhile investment, if you use them correctly. They should not be the only thing that you invest in, just as most people do not put all of their money in mutual funds. However, as part of a more diversified investment portfolio, they can be very beneficial overall. Before you get involved, be sure to check with an investment professional. 

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