10 Reasons to Love ETFs

REPRINT of a Tom Lydon piece:

March 22, 2010 at 1:00 pm by Tom Lydon

You say you want a revolution, and it’s here in the form of exchange traded funds (ETFs). Dig down into the reasons why ETFs are superior to stocks and mutual funds, and you’ll find more than enough to love.


Are you paying massive fees for a poor-performing mutual fund? Read on to see why ETFs rock:

1. ETFs are diversified. One ETF can hold dozens or hundreds of stocks. Where else can you get that kind of exposure without lopping off an arm, leg or both?

2. With ETFs, you can spice it up. If you find a straight fund too bland, perhaps a leveraged fund is more your speed. There’s no need to buy on margin; you can buy a leveraged ETF just as you would any other ETF.
3. ETFs are transparent. It’s 2 a.m.; do you know what’s in your ETF? Well, you can find out by going to the provider’s page or other sites. Now, go back to bed.

4. You can sell an ETF whenever you want. That is, when the markets are open. Mutual funds are priced once a day, at the end of the day. ETFs are continually priced and you can trade them just like you would a stock.

5. ETFs go hand-in-hand with a trend following strategy. Mutual funds tend to have investment minimums and early redemption fees that can leave your portfolio hurting if you don’t want to buy and hold. ETFs have no such restrictions, making them an ideal companion for a simple strategy.

6. ETFs are tax efficient. Because ETF shares are created differently and no cash changes hands in this process, ETFs are highly tax efficient and rarely shoot off capital gains.

7. ETFs are cheap. On average, ETFs cost less than most mutual funds. But beware: some mutual funds are cheaper than similar ETFs, so do your research to ensure you’re getting the best deal.

8. You have choices galore. Commodities, currencies, emerging markets, exotic hedge fund strategies, active management and more are available via ETFs. And that’s on top of the wide array of sector ETFs available. Not long ago, only institutional investors had exposure to things like commodities and currencies; now you can have it, too.

9. ETFs give you power. You, the investor, have control when you’re using in ETFs. You can choose your level of exposure (broad or narrow), you can choose your sector, you can compare funds on key points and choose from several competitors. The growth of the ETF industry has really helped put the control back in the investors’ hands.

10. ETFs have brains. The vast majority of ETFs passively track index, but we’re now seeing more actively managed funds come to market. Actively managed ETFs give investors transparent access to an experienced manager, but at a lower cost than mutual funds.