Exchange Traded Funds (ETFs)
Investing can be a complicated mathematical science. Unlocking all the numbers is difficult and there’s a lot of options out there that not every investor knows about.
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If you want to become a savvy investor, you need to be able to find out when you are missing out on potentially lucrative investments.
Exchange Traded Funds are commonly referred to as an ETF. These funds work a lot like stocks in that they are publically traded. Exchange traded funds work in a similar fashion to mutual funds and other investment funds. A fund manager is responsible for purchasing a large portfolio of assets. These assets will generally consist of stocks, bonds, currencies and commodities.
However, rather than paying the fund manager a large fee to purchase shares of it, these funds are traded publically like stocks. This means that you can purchase them with only the same fees that you would pay in a stock trade! This also means that you can also perform any of the actions you would with a stock. If you wanted to buy on margin or if you wanted to sell the ETF short, those are options you don’t get with regular funds!
Benefits of Exchange Traded Funds
Alright, so you think you want to start moving in and traded in ETFs? That’s great! But how do you stand to benefit from dealing in ETFs?
- No Minimum Purchase - You can purchase as many or as few shares you want. With mutual funds you will often have to reach a minimum floor which can be quite pricey for some funds. When it comes to ETFs, each share is individual and up for grabs so you can get as much or as little as you want.
- Easy Way to Get Diversification - A good portfolio is a portfolio that is full of diverse investments. That makes sure you’re never beholden to a single sector and are not at risk if a single portion of the economy suddenly isn’t as successful as it is predicted to be.
- Arbitrage Potential - A savvy day trader can look at the value of an ETF and the individual stocks that are trading. If one is more valuable than the other, the day trader can sell their more valuable option and purchase the less valuable one. This essentially allows for some quick free money trades that only require smart
- Transaction Options - As mentioned above, you have more options with an ETF than with other funds. Your ability to sell short means that you can go against the ETF if you feel is it being mismanaged or is made up of a poor collection of assets.
- Taxation Benefits - Here’s another benefit that can really assist you if you the ETF has a lot of capital gains. Because the ETF owns the assets directly and you only own them indirectly, the ETF itself is responsible for paying all capital gains taxes on those assets. This allows you to merely receive your dividends and interest without the government dipping into your pocket more than is necessary.
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