4 Reasons to Consider ETFs for Your Portfolio

Exchange-traded funds or ETFs are a type of investment fund that holds a large collection of securities (like stocks and bonds). Since many ETFs come with relatively low fees, investors often look to these funds to help them build a diversified portfolio.

1. ETFs can be an easy way to help diversify your portfolio

Because ETFs contain a diverse range of assets, they are generally considered less risky than investing in a single stock or bond. When you buy shares of an ETF, you own a stake in a fund that may hold hundreds of different stocks and bonds, which provides a certain degree of diversification already built in. However, that doesn’t mean ETFs are completely risk-free (no investment ever is), as diversification alone doesn’t guarantee a profit nor can it protect you against loss.

Also keep in mind that some ETFs are structured around a particular industry (e.g., energy) or region (e.g., emerging markets), so they may not be as well diversified as other funds with a broader investment focus.

If you’re interested in adding ETFs to your portfolio, there are many types to choose from, including bond ETFs, stock ETFs, and balanced funds that contain a mix of both stocks and bonds. Some funds are also built to track the performance of a particular market index like the S&P 500.

You can read more about ETFs in our article here.

2. ETFs can be a cost-effective way to invest

If you’ve bought or sold stocks before, you know that you often have to pay a fee for the transaction. Those fees can add up quickly if you’re purchasing a large number of securities individually.

A single ETF, on the other hand, can help you invest in a wide variety of securities without having to handpick and purchase them individually, which can be costly and time-consuming. 

And since many ETFs are passively managed, they usually have lower fees compared to an actively managed mutual fund.

Fees are an important consideration when comparing investment options. While an extra percentage point here and there may not seem like a big deal at first glance, fees can add up over time and eat into your potential return. Keep in mind that the less you have to put toward fees, the more you can keep invested. 

Good to know: Not every ETF is considered “low-cost.” For example, actively-managed ETFs tend to have higher fees compared to passively-managed ETFs. Always review the fund’s prospectus before investing to understand the fees you’ll be charged.

3. ETFs can be traded like stocks

ETFs are often compared to mutual funds, as they both provide an opportunity for you to invest in a diverse basket of assets. But unlike mutual funds, ETFs come with a little more flexibility when it comes to trading. As the name implies, ETFs can be traded on an exchange much like stocks; their share prices can fluctuate throughout the day as shares are bought and sold.

4. ETFs could be attractive from a tax perspective

Taxes are an important consideration when it comes to putting together an investment strategy. Investment income, whether in the form of interest, dividends, or capital gains, is generally taxable.

With securities like stocks, bonds, and ETFs, you may earn what’s known as capital gains, which are the profits you make when you sell an asset.

Depending on how the fund is set up or structured, ETFs are generally considered tax-efficient investments since they tend to incur fewer capital gains tax than more actively managed mutual funds. If you have questions about how a particular fund may impact your taxes, consult a tax advisor.