Reasons ETFs Are Better Than Stocks
When it comes to financial situations, everybody’s story is different. Investors have a plethora of information and investment choices at their finger tips. ETFs are relatively the new kid on the financial block but have quickly gained recognition as a must have investment vehicle. There are some significant advantages to ETFs as compared to stocks and mutual funds for investors to consider.
ETFs Give Instant Diversification
ETFs provide instant diversification relative to individual stocks. It would be challenging to have a properly diversified portfolio with 10 individual stocks, but relatively simple with the same number of ETFs. For example, purchasing an ETF that tracks a financial services index gives you ownership in a basket of financial stocks versus a single company.
As the old cliché goes, you do not want to put all your eggs into one basket. An ETF can guard against volatility (to a point) if certain stocks within the ETF fall. This removal of company-specific risk is the biggest draw for most ETF investors over owning individual stocks.
Less Due Diligence
Most ETFs contain dozens of stocks. It would require weeks for an individual investor to complete proper due diligence on each of those companies, and that is one of the advantages of ETF investing. Since the importance and impact of any one stock is relatively small, our investment team can spend their time researching which sectors and markets are poised to perform and make investment choices without being bogged down by an overwhelming amount of initial and ongoing corporate due diligence.
ETF Portfolio Benefits
ETFs are baskets of individual securities much like mutual funds but with two key differences. First, ETFs can be freely traded like stocks, while mutual fund transactions don’t occur until the market closes. Second, expense ratios tend to be lower than those of mutual funds because many ETFs are passively managed vehicles tied to an underlying index or market sector. Mutual funds, on the other hand, are more often actively managed. Because actively managed funds don’t commonly beat the performance of indices, ETFs arguably makes a better alternative to actively managed, higher-cost mutual funds.
Might Be Cheaper
ETFs can be cheaper to own and trade when compared to stocks or mutual funds. Research Financial Strategies offers a popular portfolio model of ETFs that trade commission-free. That gives them a positive cost advantage relative to individual stocks. Many ETFs, particularly index-type ETFs, have lower annual expenses than comparable mutual funds and can be cheaper to hold.
Read more: See ETFs vs Mutual Funds
Although it is possible to discover mutual funds with low minimum initial investment requirements, ETFs have no such requirements at all.
Invest In Hard-to-access Markets
Obtaining, storing and long term owning gold is a difficult task for most individual investors; owning a gold ETF is simple. Not only does a ETF bypass the bid-ask spreads of retail gold and the expense of rolling over futures contracts, but it has no security or storage requirements. Likewise, investors can access commodities like copper, precious metals, timberland and so on through the convenient forms of ETFs.
The Bottom Line
There is no such thing as a perfect investment. Still, ETFs do stand apart as an investment category with some real positives for individual and corporate investors. As a cost-effective way of achieving a broadly-diversified portfolio including hard-to-own (but worthwhile) assets, ETFs are hard to beat. Accordingly, investor will most likely find that ETFs can play a useful role in place of a portfolio of mutual funds, stocks and bonds.