4 Benefits ETF Investing May Add To Your Portfolio
A well-diversified portfolio typically has assets in a broad variety of classes, be it stocks, bonds, mutual funds, or even real estate. But for the last 24 years, one investment vehicle has come to rule them all, at least in the eyes of many investors: the exchange-traded fund. It’s become the go-to investment for high-profile investors like “Shark Tank” star Kevin O’Leary, who’s so passionate about ETFs he created his own ETF provider: O’Shares.
Today the ETF market is nearly $2 trillion, and there are nearly 2,000 U.S.-listed ETFs. But those numbers mean nothing to new investors, who may not have any idea why ETFs are so wildly popular on Wall Street.
With that in mind, below are 4 key reasons why so many investors have flocked to ETFs.
Greater Strategic Diversity
As the popularity of ETFs has surged, the sheer number of sector, industry or thematic options available for investors to add to their portfolios in the form of ETFs has increased in kind.
Investors can now find ETFs for any number of investment strategies. Whether they are looking to allocate funds to large or small cap companies, international speculation, or rules-based “smart beta” funds, such as the O'Shares FTSE U.S. Quality Dividend ETF (NYSE: OUSA). OUSA, for example, consists of 150 large-cap stocks selected for quality, low volatility, and yield. Only Apple Inc (NASDAQ: AAPL) and Johnson & Johnson (NYSE: JNJ) have more than a 5 percent weighting.
The variety of choices available frees investors to experiment with investments in dozens of common stocks at the same time, rather than accumulate a larger position in just one.
Better Liquidity
One of the most frequently cited benefits of ETF investing is their liquidity. This is usually framed by the fact that ETFs can be bought and sold like stocks and therefore have the advantage of being priced constantly throughout any given trading day.
Compared to mutual funds, which can only be bought or sold once per day, this intraday flexibility makes them ideal for people who want the ability to buy in or sell out of an ETF quickly.
Fewer Fees And Fewer Taxable Events
You have probably realized that there is something of a “best of both worlds” aspect to ETFs. Their structure provides diversification, and they’re similar to any other stock you’d buy on an exchange in that they can be freely bought and sold during the day.
The combination of these features means ETF investors avoid some of the more onerous fees and taxes attached to managed mutual funds. For example, every time an investor buys or sells shares of a mutual fund, the fund manager must respond by buying or selling underlying securities to keep the fund balanced. This creates capital gains taxes that then get passed down to the fund holders.
But ETFs don’t have this problem because investors can buy and sell on an exchange. This structure prevents ETF investors from being subject to potential capital gains taxes whenever someone else buys in or sells out of the fund.
More Transparency
Finally, and possibly most critically for long-term investors, ETFs offer a level of transparency to fund management that’s vital for those who care about how their money is handled. ETF sponsors must publish their index holdings daily, which differs from mutual funds or other actively-managed funds who are only required to disclose their holdings once per quarter.
Regardless of whether an ETF is actively managed to outperform or passively managed to track an index, the fund’s goals will always be laid out for investors in the form of a prospectus. This prospectus will also include facts on how the ETF is weighted and rebalanced, as well as other rules such as the creation and redemption of shares, and past performance. Investors should scrutinize this data closely, and remain cautious of any opportunity that is not similarly forthcoming.
O’Shares ETF Investments is an editorial partner of Benzinga. We collaborate on stories that are educational, or that we think you will find interesting.
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