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Does an Exchange-Traded Fund offer any advantages over other forms of investment?

Home » Investing » Exchange Traded Funds ETFs » Does an Exchange-Traded Fund offer any advantages over other forms of investment?

Like mutual funds, perhaps the most significant advantage of an exchange-traded fund lies in its diversification. A key in any investment scenario is the mitigation of as much risk as possible while maintaining the ability to realize profit. As opposed to typical stock investment, investment in an exchange-traded fund allocates investor resources among numerous securities or bonds, which significantly lowers investor risk. Exchange-traded funds also enjoy several advantages over traditional mutual funds, such as:


  • Lower Expense/cost ratios: Because of the dynamic nature of the mutual fund management process, the expense ratios of many mutual funds are as high as 3%. In contrast, exchange-traded funds are, by their very nature, significantly more static. Consequently, exchange-traded fund expense ratios are often 1% or lower – a savings that adds up over time.
  • Tax Efficiency: In a traditional mutual fund, shares are frequently redeemed, especially in the midst of a market downturn. Within the United States, gains realized as a result of such redemption trigger immediate capital gains for all shareholders. In an exchange-traded fund only institutional investors may redeem their shares, and that redemption isn’t a taxable event. As a result, retail investors only encounter capital gains when they sell their own shares, so an investor’s capital remains an asset for a longer period of time.
  • Stock Characteristics: Because exchange-traded funds are traded on a stock exchange, they offer investors a number of investment techniques unavailable within a mutual fund. For example, shareholders in an exchange-traded fund may sell short or buy on margin. Additionally, exchange-traded funds are priced throughout each day and are always available, so it’s easy to buy or sell at any time.
  • No Minimum Investment: Although many mutual funds offer relatively low minimum investment prices, exchange-traded funds require no minimum investment at all. The investor determines simply determines how many shares he or she wishes to purchase.



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