Unlock the Benefits of Investing in Exchange Traded Funds (ETFs)
The main benefits of investing in ETFs (exchange-traded funds) are diversification in a single trade, generally low expense ratios, the ability to buy and sell during the trading day like a stock, access to asset classes such as bonds, commodities, and international markets, and tax efficiency compared with many mutual funds. ETFs still carry the risk of the assets they hold, and some (such as narrow sector or leveraged ETFs) can be more volatile than the broad market. This article explains each benefit; it is educational, not investment advice.
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Investment Strategies & Diversification
Diversification is the process of investing in various asset classes, such as stocks, bonds, and commodities, to mitigate portfolio volatility and create a more balanced and less risky portfolio. ETFs can be used to diversify a portfolio efficiently and without having to purchase multiple full-priced stocks. An ETF is a security that tracks an index or a basket of assets, and is composed of a variety of stocks, bonds, or commodities.
Portfolio Allocation
By choosing an ETF to supplement a portfolio, an investor can diversify their investments and reduce the risk of overexposure to any single asset class or industry. ETFs can help diversify investors’ portfolios, providing access to specific markets or sectors without having to purchase all the underlying securities.
Risk Management
ETFs also offer risk management benefits, such as providing access to markets that may be difficult to access with traditional securities. ETFs offer a variety of different options for investors to choose from, depending on the investor’s risk tolerance. Broad-market ETFs are often a low-cost way to hold many securities at once, and popular ETFs trade with high volume.
Asset Class Selection
An ETF provides investors access to a wide variety of asset classes that traditional securities can’t always provide. Examples of asset classes that ETFs invest in are commodities, currencies, and international markets. This provides increased diversification to the portfolio and can spread risk across different sectors.
Tax Efficiency
ETFs are also known for their tax efficiency. The in-kind creation and redemption process lets many ETFs avoid distributing capital gains, which can lower investors' tax bills compared with similar mutual funds. ETFs still pay out dividends and interest from their holdings, which are taxable.
Market Volatility and Liquidity
A diversified ETF is usually less volatile than a single stock because gains and losses across its holdings partly offset, though it still falls when its market falls. Additionally, ETFs have a high level of liquidity, meaning investors can buy and sell quickly.
Exchangelisted Securities
ETFs are also exchangelisted securities, meaning they are traded on public exchanges and are subject to the same regulations as stocks. ETFs also offer investors the flexibility to buy and sell at any time during the trading day.
MarketXLS
MarketXLS is an Excel and Google Sheets add-in with functions for quotes, technical indicators, options pricing, and fund data such as =FundExpenseRatio("SPY") and =FundHoldings("SPY"). MarketXLS also offers a free ETF screener and ETF comparison tool. With MarketXLS, investors can easily view data on SPDR S&P 500 Trust ETF, one of the most popular ETFs, as well as gain insight into other securities and ETFs. MarketXLS is designed to provide investors with an in-depth view of the stock market, enabling them to make better decisions about their investments. And for those who are new to investing, MarketXLS also features beginner tutorials, such as Options Trading for Beginners.
Ready-made workbooks are in MarketXLS templates.
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