Advantages Of ETFs: Why Should I Invest In ETFs?
This guide is part of our Comprehensive Guide To ETFs. We strongly recommend checking out the guide in full to get a better understanding of ETFs.
6 reasons to invest in ETFs include:
- Capital growth and income
- Access to foreign markets
- Exchange traded
- Small management expenses
- Tax efficiency
Diversification means lower risk. ETFs generally hold a portfolio that comprises of different securities that make up an index. Holding many securities across multiple industry sectors means that there is less risk from individual securities on the entire portfolio.
Capital growth and income
ETFs will pay the income that they receive from their portfolio to the ETFs investors. An ETF that holds shares will pay the dividends and franking credits that are earned on the shares to its investors.
Access to foreign markets
ETFs can hold a wide variety of securities and are not limited to just holding securities on the same exchange that the ETF trades on. There are ETFs that trade on the ASX that hold shares that trade on exchanges in the US, Asia and Europe for instance. This provides low-cost access to foreign markets.
Traded on exchanges
Because many ETFs trade on large securities exchanges like the ASX the buy and sell process is just like buying and selling shares. Large exchanges also mean frequently updated and easy to access market information like the price and volume for ETFs being traded.
Small management expenses
ETFs charge management fees in order to maintain the running of the fund. In comparison to regular managed funds ETFs charge very small management fees. This is possible because managers of ETFs do not have to spend time and effort picking individual securities to invest in. Instead most ETFs just track an index and managers will only adjust the fund if the index changes its composition. This is known as a ‘passive’ fund.
As stated above managers of ETFs will only adjust the fund’s portfolio if the index it tracks changes composition. This occurs infrequently and as such ETFs buy and sell securities much less than managed funds. Because ETFs buy and sell relatively little they do not incur relatively high capital gains. This means that investors in the ETF are not subjected to capital gains tax that arises when securities are sold for a profit.
This is in contrast to managed funds which buy and sell securities when they receive more money from investors or investors request a withdrawal of their money from the fund. Every time that process occurs the fund manager must go into the market and buy and sell securities in proportion to the rest of the fund.
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