How Can Small Portfolio Investors Benefit From an ETF?
Are you looking for ways to make your money grow? Then you’ve come to the right place.
Investing in stocks, bonds, commodities, or exchange-traded funds are great ways to earn attractive rates of return. Moreover, investing wisely can reap rewards that idle capital just won’t.
As an investor, you need to do thorough research. There are multiple routes that you can take to invest your hard-earned cash. However, investing in a portfolio is a preferred choice for many. Depending on what your objectives are, there are several types of securities for various purposes, one of which is an exchange-traded fund (ETF).
Investing In An ETF
As the name suggests, an exchange-traded fund is traded on an exchange just like stocks. Therefore, share prices fluctuate as they are bought and sold. But unlike a stock, an ETF comprises of multiple assets. They may consist of stocks from across various industries, commodities, bonds, or even a mixture of investment types.
Most ETFs typically trade close to their underlying value. But the price does fluctuate continuously throughout the day. While you have access to a variety of low-cost asset classes, you must also keep in mind that there are risks involved. However, with a few smart investment tips, you can surely make a handsome profit.
Investors strive to find effective means to optimize risk-adjusted returns. For this purpose, there are many tools and software available that can help track and manage your portfolios. Consider the example of investment portfolio management software- Ziggma, which is specifically designed to make investing easy. You can utilize tools like these to stay on top of your portfolios and find the best possible opportunities according to your long term goals.
What Benefits Can Small Portfolio Investors Gain From ETFs?
Exchange-traded funds have gained a great deal of popularity over the past decades. According to CNBC, US-based exchange-traded funds racked up a record $4 trillion in assets just last year. Many people have incorporated them into their investment strategy and are eager to avail all the advantages they have to offer. In fact, it’s an ideal option for young investors with small amounts of capital.
Let’s take a closer look at some of the reasons.
Variety of Investment Choices
With over 2,000 U.S.-based exchange-traded funds, there is a wide range of ETFs to choose from, especially when taking into consideration the numerous sectors and niche-specific areas. But even so, investors are faced with a variety of asset class options. You can look into stocks, bonds, real estate, and even international investment.
Moreover, you have the opportunity to track and invest in particular markets or segments that you are interested in. Now you can focus on a small slice of a sector where you want exposure.
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One of the most significant advantages of EFTs is that they can be purchased in pocket-sized amounts. With no minimum requirements, investors are free to jump in whenever they have enough capital.
Additionally, with the extensive range of ETFs, investors are exposed to numerous sectors and industries. For those who do not have adequate knowledge and experience in these areas or trading strategies, it’s an easy way to interact with a specific market segment.But because of portfolio diversification, you can hedge your risk. For example, inverse ETFs allow portfolio managers to take out or manage the market risk from either an entire portfolio or a specific segment of that portfolio. For small or young investors, this is an added bonus.
Traditional mutual funds are usually traded once a day. And since investors have to wait until after the market closes to receive updates on shares they bought and sold, it’s challenging for them to know exactly how much they will receive when selling shares. While this may be perfect for some investors, others demand more flexibility.
ETFs are the ideal solution for those who want to participate in the market during trading hours. Investors are notified almost immediately about prices, making trading a breeze. More importantly, moving capital between asset classes is simple. This allows traders to make further investment decisions in real-time.
The general rule all investors know is that the lower the cost of investing, the higher the expected rate of return. Moreover, all managed funds incur costs such as portfolio management fees, administrative expenses, marketing expenses, trading fees, etc. At the end of the day, it is the collection of these numbers that influences the profitability of your investments.
Since ETFs are traded like stocks, operation costs are streamlined. That’s because when you’re dealing with a basket of stocks, only one transaction cost is acquired per trade. So there are less broker commissions than if you had purchased the shares individually.ETFs usually also have lower expenses with respect to statements and notifications about transactions and transfers than open-end funds. With a reduced administrative burden, ETF companies have less overhead costs, so part of the savings is passed on to the investor. Moreover, ETF shareholders do not have to pay short-term redemption fees that some open-end funds charge.
Like stocks, ETFs are traded throughout market hours. That means that they can be bought and sold anytime. This offers small portfolio investors a great deal of liquidity, a major plus point over mutual funds. So any time an investor recognizes a risk of losing money, they can quickly exit and save their capital.
More Tax Efficiency
ETFs are often labeled as tax-friendly investments. Because of its structure, they acquire fewer capital gains taxes than mutual funds. Moreover, ETFs have lower capital gains, which is payable only when it is sold.
Availability of Management Choices
With ETFs, investors can either manage their investments actively or passively, or even a combination of both. For people who are newcomers, a passive management approach can help them get accustomed to the investor climate and learn the ropes with relatively lower risk options. But as their confidence builds, they can choose to manage an account actively and implement advanced portfolio management strategies.
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Investing is a great way to take advantage of the financial market. With the availability of exchange-traded funds, small portfolio investors can invest in a wide variety of investment choices and track the broader market for other opportunities. Keeping up with ETF trends is an ideal way of knowing about new, innovative products in the market.
Evie Harrison is a blogger by choice. She loves to discover the world around her. She likes to share her discoveries, experiences and express herself through her blogs. Find her on Twitter:@iamevieharrison
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