ETF Investing, ETF Investment

By: EconomyWatch   Date: 4 August 2009

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ETF Investing or ETF Investment is a profitable option for those who delve into the finer details of the ETFs. Exchange traded funds are investment vehicles that hold a collection of stocks of many companies or few (depending on their category) and later, they market the final securities as stocks to the investors.

 

How To Make an ETF Investment
 

Investing in ETFs is similar to investing in stocks. It requires a trader to buy or sell a share of an ETF. Different commissions are applied on these transactions. However, a trader gets the flexibility of buying just one share or many. They are unlike mutual funds where a minimum number is required to be bought.

 

Advantages of ETF Investment
 

ETF investments offer many advantages that help a trader to not only make profits but also minimize the risk through diversification. The main advantages are:

  • Low cost: Most of the ETFs are not actively managed. So, they require no commissions to be paid for the updates. ETF’s marketing, accounting and distribution costs are generally lower than that of other investments products.

  • Transaction flexibility: ETF is sold and bought at the current market prices throughout the day. As they are publicly traded securities, ETFs can be bought on margin and sold quickly to let a trader hedge his investments. This way, a trader can use stop order, and limit orders for quick profits

  • Tax efficiency: ETF offers greater tax efficiency as they do not require selling any securities to redeem investors.

  • Diversification: ETF allows a greater diversification to rebalance portfolio into a profitable investment. ETF offers diversification to a wide range of the markets such as broad based indexes, bond indexes and commodities.  

Disadvantages of ETF Investment  

ETF investments are not always profitable. Points to consider are:

  • Not all ETFs are traded frequently. Therefore, ETF investments made with intra-day trading in mind might not always work.

  • Gold ETFs attract high wealth tax rates.

  • The bid/ask price spread could be too wide. This negates the prospects of big profits.

Keeping all these points in mind, it is important to research well. Learn about the portfolio of the ETF, check its history and whether the ETF will improve in the future or not and then decide to invest or not invest.


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