The United States remains one of the most attractive investment destinations on the planet today. Every day, billions of dollars are traded on Wall Street, making it the most liquid financial arena with astronomical volumes.
Because there is so much money at stake, whether there is a market meltdown or a meteoric rally, financial institutions have created thousands of different products for all types of investors, from the seasoned to the beginner. One of these is the exchange-traded fund (ETF).
An ETF is essentially an investment fund that pools stocks and trades on stock exchanges. It functions similarly to a mutual fund, except that ETFs are bought and sold throughout the trading session as opposed to their price at the end of the session.
Today, there are more than 2,000 ETFs, with fund assets that have topped $5 trillion in assets.
Should you invest in an ETF? Let’s explore some of the features and advantages of owning an ETF.
1. Investment Simplification
Let’s say you are interested in investing in crude oil stocks. In the U.S., there are dozens of stocks to choose from, so which one should you buy? Halliburton? Suncor? Chevron? Exxon?
For novice investors, this decision demands ample research and risk. You cannot be cavalier with your hard-earned money.
ETF investing offers you the option of holding a basket of partial stock shares, or a kind of mini-portfolio. You buy a diversified ETF that tracks various stocks, serving as an index for traders.
This simple approach is beneficial too because you could save on transaction costs with your investment platform.
A dividend is a payment of profits by a company or investment fund to its shareholders.
Many ETFs distribute their dividends the same as a stock, with payments occurring every month or quarter instead of annually. Or, in exceptional circumstances like the SoFi Weekly Income ETF, you could receive a weekly dividend.
ETFs are cost-effective because there is only one transaction per trade, and management fees are lower than actively managed funds.
Overall, you will save more money by accumulating shares in an ETF instead of acquiring either individual stocks or mutual funds.
4. Tax Advantages
Do you want to save on capital gains taxes? ETFs might be the investment solution for you!
Financial institutions will typically market ETFs as being tax-efficient. This is because capital gains are not realized until the assets are sold, so your penalty will be deferred until you hit the sell button.
Further, since EFTs are passively managed, they tend to incur fewer market transactions in comparison to a mutual fund, and therefore the annual tax bill tends to be lower.
Note that your ETF dividends will still be taxed as they are distributed.
5. Passive Management
The objective of an ETF is to replicate an index or a benchmark without attempting to outperform it.
Therefore, many ETFs are passively managed without constant interventions and adjustments.
This is beneficial because there is less risk to your investment and you endure lower and fewer management costs.
According to the Securities and Exchange Commission (SEC), investment funds behind ETFs are mandated to give a list of assets in the fund each trading day.
This offers you more intimate knowledge of the ETF you own instead of being in the dark regarding what is going on behind the scenes.
Since the financial market is a complicated landscape, the more accountability, and transparency, the better for everybody.
What are the most popular ETFs in the United States market today? Here are the top five based on average volume:
- SPDR S&P 500 ETF (SPY): 71,325,813
- ProShares UltraPro Short QQQ (SQQQ): 59,813,688
- Financial Select Sector SPDR Fund (XLF): 54,160,898
- iShares MSCI Emerging Markets ETF (EEM): 44,822,266
- ProShares Ultra VIX Short-Term Futures (UVXY): 44,755,711
So, why do these numbers matter? Because the trading volumes highlight how liquid (an investment that is easily converted into cash without a harmful impact on the stock market) the ETF is for investors.
Many ETFs are liquid and will function like a stock. You could even automatically invest in them from your all-in-one checking and investing account.
Ultimately, there is a reason why the ETF market has topped $5 trillion in assets. And believe it or not, market observers believe that the industry is still in its early days. Considering that the top ten ETFs trading on U.S. exchanges account for a little more than one-quarter of total U.S. assets under management, this makes sense.
As more people enter the market, the popularity of ETFs will continue to increase. In the end, ETFs are utilized by all types of investors and traders, from the institutional to the armchair investor.
They can give you exposure to certain sectors and a diverse array of stocks, many of which may have been off-limits due to their soaring shares (think Tesla or Amazon). Many ETFs can offer you a steady income without the drawbacks of fees. Sounds like a win-win to us!