The world of financing has a lot of terminologies, with terms continually evolving. Before 1992, an ETF (also known as an exchange-traded fund) did not exist yet. But after its introduction in 1993, it became the talk of the town when investors took advantage of its newness. It featured a diversified broadness that no other investment vehicle has; this fund is something like a stock and an index mutual fund, but it is also totally different from those two.
So what is an ETF? To simplify, it is an investment fund that puts money from different investors into a virtual basket. The investments can include bonds, currencies, and stocks, and the diversification quality lessens the risk of money lost. A major stock exchange – or a place where trade happens – get the chance to trade them. It may look like mutual funds, but it is a more upgraded version of it.
You may ask, why go for exchange-traded funds? These are some of the reasons why.
One can buy ETF shares as soon as the markets open. For mutual funds, you still need to wait for the announcement of the fund net asset value (or NAV) before you know the price of the shares you bought. But for ETFs, you can immediately know how much you bought a stock and how much the selling price is. Trading is almost instantaneous, which makes it different from other investment vehicles. Portfolio management is more accessible. You can do investment allocation changes quickly and efficiently. ETF investors can even do short selling. These shareholders make timely investment decisions without waiting for the end-of-day NAV.
Most investors find the management of portfolios and allocation of assets difficult. Since ETFs are broadly diversified, an investor can see and expose himself to a desired market segment or industry. Now, one can make ETF investments in high yielding world currencies. An investor can also sell or buy a stock based on stock market volatility. The possibilities of a good portfolio exposure are endless.
Managed funds will incur some cost – administrative expenses, fees from the management of the portfolio, distribution, and marketing expenses are just some of them. ETFs have charges handed to brokerage firms. Administrative costs go down since there is no need to staff a customer call centre for queries from individual investors. Since the brokerage issue the paperwork for annual tax reports, monthly statements, and quarterly reports, ETF companies have lower overhead. The investors can feel the savings part through lower fund expenses.
Of course, when you earn, the government gets money from you, too. So the primary tax benefit of an ETF is the capital gain tax. Compared to mutual funds, ETFs have a lower capital gain tax, and that is a big plus for the ETFs. Capital gain taxes are payable when you sell the whole ETF. Taxes are withheld if the seller sold a part of it. When there is full trading of the ETF, the capital gain tax will be released.
Stock trading is a serious business. If you do not know what and when to trade, you can lose a whole lot of money. It is best to get an ETF company to manage your portfolio. It is the most effective way to buy and sell stocks the right way without losing profit.