In the financial world, Exchange Traded Funds (ETFs) are like the new kid on the block. The new, ambitious, entrepreneur-y -type kid. It’s like it came out of nowhere and disrupted the market. Unfamiliar with the term? Here’s all you need to know to be familiar with it.
ETFs have been around for some time. However, they grew in popularity at an incredible rate since 2006. Mutual funds – long touted as the safe and default option for new and old investors alike – are now second in popularity. Guess what took the first spot? Yes, ETFs.
This was confirmed by the survey results of ‘2015 Trends in Investing Survey: Where Financial Advisers are Investing Now‘, of which 97% of its 303 respondents were CFP™-certified (Certified Financial Planner), online financial advisors.
What made ETFs so popular? Here are the 3 amazing benefits.
ETFs Make Diversification Easy
Have you heard of the phrase ‘Don’t put all your eggs in one basket’? Of course, you have.
In investing, this means that you shouldn’t focus on just one investment vehicle. Even if you are confident in the potential performance of a type of investment option (let’s say, stocks), you should still invest in something else, just in case you were wrong. You don’t want to lose everything.
ETFs cover indexes of stocks, commodities, bonds (and other stuff – we’ll get to that in a bit) on a macro level. This means that when you invest in ETFs, you get the whole coverage in that category.
ETFs Have A Lot of Categories to Choose From
The range of available ETFs for the individual investor to choose from is staggering.
ETFs are amazingly adaptable to customer appetite and demand. Their categories can be incredibly wide or incredibly niche. They can also cater to the fast-paced market trends and short-lived market demands. This means that there is probably an ETF (or two) out there that will be the perfect addition to your investment portfolio, at any given time, at any investment strategy.
So we mentioned that ETFs can cover indexes, stocks, bonds, and commodities. They can also track currencies, real estate, specific industries, and regions. Furthermore, you can also get ETFs formulated based on investment strategies and investment styles. Yes, you can get ETFs that cover stocks only from ethical companies, if you wish. Or only pharmaceutical companies.
ETFs categories keep expanding as we speak – you can check out one version of ETFs categorisation here.
ETFs Have Low Entry Cost
Due to their nature, most ETFs are passively managed, as opposed to actively managed investment options like mutual funds and stocks. Actively managed investments require the active supervision of a fund manager, therefore they are more expensive. As a result, most ETFs have lower fees.
Furthermore, ETFs are also great value for money. With a relatively small sum, the individual investor can cast her net into a whole category or sector, without paying individual fees for each of the asset included in that ETFs.
Downsides of ETFs?
ETFs are an undeniably attractive option for the individual investor. Their popularity will continue – expect more ETFs trends and exciting categories in the future.
Of course, no investment vehicle is risk-free – ETFs included. Here are some flaws you should know before you decide to invest in ETFs.
If you are interested in ETFs, you should get familiar with how mutual funds and stocks work, since ETFs have similar qualities to both options, and you can apply some of those strategies to strengthen your investment game plan. A good place to start is The New Savvy’s Investment page.
ETFs options are also most concentrated in the United States – so we urge you to carefully sift through the available information on the internet so that you don’t mistakenly apply the wrong regulations in Singapore.
That said, you should definitely look at ETFs as an option, due to the above benefits they can offer.Recommend0 recommendationsPublished in