ETFs (Exchange Traded Funds) have been launched in 1993 with introduction of SPDRs that tracks the S&P 500 index. SPDRs remains by now as one of the most traded stock on the stock market. ETFs should be considered as funds that could be traded as stocks and this is their main advantage.
By comparing exchange traded fund to the
mutual fund we may see following advantages:
1. Mutual funds are traded once a day and no matter when you make a decision to buy/sell mutual fund you will be filled at the same price and at the same time as all other investors. In case with ETFs, you may trade them as stocks and you can purchase or sell them on intraday basis. Mutual funds traders do not the ETF’s intraday flexibility and cannot benefit from the intraday price movements.
2. When you work with mutual funds you can buy them to open a position only. That means that you may profit only from them in rising market (Bullish Market). If you want to participate in the Bearish market movement you have to look for inverse funds. When you work with exchange traded funds you do not have to look for another security, you may buy it long and you may sell it short. Furthermore ETFs give investors wider range of choices of speculative trading strategies.
3. Low cost of ETFs in comparison to mutual funds is another important factor that attracts a lot of professional and retail investors. Exchange traded funds offer all benefit of the mutual funds, yet, at much lower cost.
Now, when you compare the exchange traded funds to stock you will find that:
1. The main ETFs advantage is a portfolio diversification that could be obtained in case of ETFs. By purchasing a single share of
ETF a trader invest into all stocks from the basket of the index this ETF tracks. For instance when you buy one share of SPY, you are purchasing a part in the ownership of all 500 companies listed in the
S&P 500 index.
2. The other main advantage derived from this is that the index and of course its tracking stock (ETF) cannot file bankruptcy.
3. When you invest into the stocks, especially when you have several stocks in your portfolio, it become complicated to have fundamental and technical analysis properly done to all of them. In case of the exchange traded funds most likely you will end by analyzing only one index and most likely it will be only technical analysis. Furthermore ETFs analysis is simpler than stock analysis.
The last, yet, one of the most important ETF’s advantages is its tax efficiency.
