4 Reasons to Consider ETFs for Your Portfolio

Exchange-Traded Funds (ETFs) are one of the most popular ways to invest in financial markets today. But what are they exactly? Think of ETFs as a basket of securities: they’re essentially a pre-selected collection of securities, typically stocks and bonds, all wrapped up in one fund. 

Their name also gives away how they work: “exchange-traded” means these funds are bought and sold on an exchange just like stocks, and you can trade them during normal trading hours. If you want to invest in an ETF you basically go about it the same way you would with buying a security like a stock, and purchase them through a broker or brokerage account.

2. Lower costs can leave more money in your pocket

If you’ve bought or sold stocks before, you know that you often pay fees each time you make a transaction — and those fees can add up quickly if you’re purchasing a bunch of securities individually. With ETFs, though, there’s only one transaction you pay fees on and you get access to an entire collection of assets at once.

Good to know: You’ll still likely have to pay a managment fee, but most ETFs generally have lower annual expenses than mutual funds. In fact, the average equity ETF charges just 0.53% in annual expenses, compared to the average U.S. equity mutual fund which charges 1.42%. 

3. ETFs can be traded as easily as stocks 

Like mutual funds, ETFs can give you a diverse basket of assets. But ETFs come with an added bonus: unlike mutual funds which only trade at the end of the day, ETFs can be traded the same way as traditional stocks and commodities on the stock market.

Since ETFs are traded during normal hours on the stock market and exchange hands hundreds of times each day, investors can jump in and out at will, just like they might with buying and selling stocks. 

4. ETFs may be attractive from a tax perspective

ETFs are sometimes referred to as “tax-friendly” investments. While that’s not to say you won’t pay taxes on your ETF capital gains – the profit you make off a sale of a capital asset that’s typically considered taxable income – ETFs come with two major tax advantages, at least compared to actively managed mutual funds.

Because of how they are each set up, ETFs can incur fewer capital gains taxes and lower long-term capital gains rates than actively managed mutual funds. With ETFs, you also won’t have to pay taxes on your capital gains until you sell the assets. With actively managed mutual funds, investors will pay capital gains taxes while holding the securities, because managers will liquidate and purchase investments in an effort to beat the market.

The bottom line 

Hopefully going over some of the features of ETFs has given you an idea of how they could potentially work for your investing goals. In a way, ETFs are like a combination of a stock and a mutual fund: they can provide similar diversity of a mutual fund but with the same ease of trading as stocks. On top of that, ETFs are often an easy way to diversify your portfolio, typically with less work and lower costs than buying stocks or bonds individually.