ETF Trading: Benefits and Drawbacks
EFT stands for Exchange Traded Funds. This is a fairly new way in which people can trade much like stocks, however the funds themselves are more like mutual funds. EFT trading first began in 1993 and since then has become more popular, however, the majority of the people out there still have no idea what these funds are nor the many advantages that they offer the trader.
There are four main reasons why these funds should be considered the investment opportunity that a person should really get involved in. These reasons are the funds are able to be traded much like a stock, low expense ratios, diversification and tax efficiency.
Though the funds are compared to the mutual fund, they have one distinct difference that really makes these exchange traded funds worthy of attention. Mutual funds are traded during a day, however, the price is determined at the end of the day. Which means that no matter the time of day that you purchase these mutual funds you get whatever the price is at the end of the day. EFT's are more like stocks. If you see the market rising, you can purchase the fund and then sell it before you believe the market is going to start decreasing in order to maximize your profit. Basically, you get the advantage of choosing the market in which you sell in so that you can get the better price.
The low expense ratio is perhaps the biggest reason that people turn to these funds in order to supplement their portfolio. Why are the expenses so much cheaper when compared to other investments like stocks and mutual funds? The funds are traded on a market that is considered low price and because of this the savings are passed back to the investor. The market that these funds are traded on works on an eleven point scale, whereas other markets work on a one hundred point scale. Those who are looking to save money should look at these funds as the main option. However, do keep in mind that trading occurs through a broker, so there are fees associated with the funds in this aspect. However, even with the broker fee, it is still much cheaper to trade these funds than any other type of investment.
These funds are also easy to diversify your portfolio with. There are EFT's that are available at the international level, as well as the regional level, as well as those that cover all of the available indexes. Thus, you are not limited in what you want to do. A huge plus for those that want to diversify.
For those that are simply not investing because they are aware of the various taxes that are involved with the game, then these funds can help to alleviate some of the discomfort you may feel with getting into the investment and trading markets. The person can choose to avoid any kind of taxes of these funds if they are simply sitting on them waiting to trade. They do not incur the taxes until they are traded. Plus, if the fund is rather large, there are some incentives that are given to the person that can relieve some of the tax damage.
Though there are many advantages, the investor cannot overlook some of the flaws of these funds. For starters, the fee for trading is something that most people need to take into account. Secondly, people need to realize that the fund can fluctuate especially if you follow a specific sector that may do good one month, then plummet the next. Though many people would like to think that these funds are absent of risk, they really aren't. And lastly, people need to realize that some of these funds are ones that you may not be able to trade fast enough to suit your needs, thus you should consider which fund you invest in from the beginning.
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