There are three things to know about Exchange Traded Funds. How they are traded, the cost of the trade, their investment benefits. Once you know that you can make an informed decision as to whether or not they should be part of your portfolio. This article will give you these basics.
Just Like Stocks You Can Trade ETFs
Just as the S & P 500 index is made up of an underlying collection of stocks, an ETF would be based on the same stocks as the index. It therefore mirrors the performance of the index.
Because each ETF has its own ticker symbol and expense ratio it is traded just like a stock. And like a stock you can use it for day trading, swing trading or just hold it for long term gains. Mutual funds on the other hand, which are similar to ETFs, incur a financial penalty if you don’t hold them for specific amounts of time. Keep in mind that like stocks and ETF is priced by the market not by the net value of the underlying assets.
Economical To Trade
The trading restrictions of mutual funds cost you money by forcing you to hold them for a set amount of time if you do not want to pay a penalty. With an ETF you can do what you want when you want. You decide when to buy, sell or hold. Additionally there is a lower cost associated with the expense ratio. The expense ratio expresses the operating costs and management fees as a percentage of the net assets of the fund over a stated amount of time.
It is important to note that brokerage costs and other various transaction costs are not part of expense ratios. Therefore the fact that and ETF charges .1 to 1 percent is a substantial saving over a mutual fund that charges 1 to 3 percent.
Your Reasons For Trading In ETFs
Just like mutual funds ETFs follow an index. Currently ETFs have gone beyond just mirroring an index such as the S & P 500 and know follow different industry groups and sectors. The advantage of dealing with an ETF is that; you do not have to open multiple accounts they tend to have lower tax liability you do not have to deal with the individual contract details of each stock.
By knowing how ETFs are traded, the cost of ETFs and their benefits you can decide how to make them part of your stock market strategy. You can use them to lessen your financial risk, build your wealth and make good use of your time.