Here at FC360, we talk a lot about Exchange Traded Funds (ETFs). These types of securities have many great benefits for investors because they are low-cost, flexible and allow for a lot of diversification. Here are some of the basics about ETFs and why you should be investing in them.
What are they?
ETFs are securities (funds) that trade on the open stock exchange. They track indexes (like the S&P 500 or NASDAQ) with the goal of producing identical returns. Some may see this “passive” investing and think it’s counterintuitive. Isn’t the point of investing to beat the market? Interestingly enough, since the 1970s “passive” investing like ETFs, and other index-tracking funds have constantly outperformed actively managed portfolios.
How do they work?
Basically, ETFs track a commodity, index, market sector or basket of assets. ETF funds are a combination of many different investment assets, much like a mutual fund. With ETFs you can invest in entire markets, sectors, regions and asset types. These can include, for example: stocks, bonds, real estate, international investments, commodities and currencies.
Why do people like them?
As you can see above, ETFs allow you to invest in many different positions and asset classes with the purchase of a single ETF share. As a result, you can can have a higher level of diversification even if you do not have hundreds of thousands of dollars to invest. On the other hand, let’s look at the case of mutual funds. While you’re still getting multiple positions and diversification when buying a single mutual fund share, an active portfolio manager is making the choice of what those positions are and is charging you a fee to do it. This is another reason why ETFs are a very cost-effective option. Additionally, ETFs are extremely flexible, as they are priced and traded continuously throughout the day on the public stock exchange.
Put simply, ETFs are preferred investment vehicles for many reasons, including but not limited to the fact that they are transparent, there are fewer administrative costs associated with them and therefore, there are fewer recurring costs diminishing your returns. Not to mention, they are more tax efficient–and who doesn’t love that?
Why we like them
FC360 uses portfolios constructed with ETFs for our clients because it allows us to keep investment costs minimal compared to high fee mutual funds. Commission-free ETFs combined with efficient technology lets us manage your accounts for as low as $3 a month, request a consultation now.