Once upon a time, ETF investments were met with skepticism as the new kid on the block. Now that they have been around for over 20 years in the U.S., ETFs are valued as a low-cost option that allows investments across various asset classes and geographies. Compared to mutual funds, they’re a “hands-off” type of investment.
The global ETFs industry has gained momentum with a record level of $372 billion in net new assets in 2015. This represents a 10% increase over the prior record of $338 billion, according to research and consultancy firm ETFGI.
Depending on whether you manage your investments yourself or use a financial planner, it is always important to assess your risk tolerance before investing. Are you curious about ETFs and wondering how they could work for you? Keep reading to find out some of the top reasons you may want to consider this increasingly lucrative investment option.
What is an ETF?
ETFs are investment funds that trade daily like a stock. They are designed to track and replicate an index, whether the S&P 500, Dow Jones Industrial Average, or the Russell 2000.
Why use ETFs?
Efficiency, value, exposure to emerging markets and diversification are just a few reasons more and more retirees are flocking to ETFs. Plus, ETFs have more flexibility than many other investment options. Let’s explore a few more factors investors have to consider when weighing this investment vehicle.
- Cost efficient
The most widely cited reason for investing in ETFs is that they are low cost. The asset-weighted average total expense ratio for ETFs in the U.S. currently stands at 0.27 percent basis points. ETFs do not charge a load, or commission, and this is another advantage. - Greater tax efficiency
Like many investments, ETFs have tax implications, but there are fewer capital gains with ETFs compared to mutual funds. - Trading
It is important to establish a trading strategy. Technical analysis is not for everybody, and a key understanding of markets is important. There are many variables to consider. Remember that the success of your investment will depend on whether the market goes up or down. - Asset classes
Savvy investors who have some understanding of the markets will know that the flexibility of ETFs allows investors to capture opportunities. ETFs are available in various asset classes such as bonds, commodities, currencies and real estate. When choosing exposure to a certain asset class, choice matters. ETFs can be invested in a number of asset classes as well as countries and regions. - Liquidity
How liquid the ETFs are depends on your choice of ETF and the current investment environment. Many investors use them as a way to enter and exit positions quickly. - Diversification
ETF investors can diversify across several asset classes. Whether you adjust your asset allocations in your portfolio tactically or passively is entirely up to you. - Transparency
There is no doubt that ETFs have better transparency than mutual funds, and being able to check your position on a daily basis is a huge bonus. ETF issuers publish a list of securities they invest in daily. It is important for investors to be aware of additional costs that may be accrued.
Clearly, there are many compelling reasons to consider investing in exchange-traded funds for retirement, but only you can decide if they’re right for your financial situation. By educating yourself about the pros and cons of ETFs, you can feel confident moving forward with your retirement savings, however you choose to invest.
Tanzeel Akhtar is a writer for Traditional IRA and Roth IRA. She has worked for Interactive Investor, Fundweb, the Mining Journal, Marketing Week and Euromoney. Tanzeel has also contributed to the Wall Street Journal, Global Investor, CNBC and Forbes.
