Exchange-traded funds (ETFs) have been around for almost 30 years, and in this time they’ve risen to prominence as a promising option for investors who are looking for a different place to put their money.
So what are the benefits of ETFs compared with other investment products, and what’s the best way to get involved with them?
The Perks of Picking An ETF
First of all, it’s worth pointing out that gains made through ETF investments are still subject to tax, so you need to stay on top of your responsibilities in this regard to sidestep penalties.
With that in mind, let’s talk about some of the reasons to plow your capital into an ETF, including:
1. Low risk & diverse
For risk-averse investors, an ETF will be appealing, because there’s not a significant cost associated with getting involved, and the diversity of the assets they contain minimizes the amount of exposure to significant swings in value.
2. Easily Tradable
For practical purposes, ETFs can be treated in much the same way as a standard stock, meaning you can buy or sell them whenever you wish, since prices are refreshed regularly.
ETFs are passive by design, meaning that they aren’t being directly managed like equivalent mutual funds. This reduces the fees you’ll pay to participate, since there are very few overheads involved in handling them.
4. Tax efficient
We mentioned that you still have to pay capital gains tax on ETFs, but this is generally a smaller amount than a mutual fund because the gains themselves are not realized as regularly. So for a long term investment that doesn’t cost you consistently in tax, an ETF ticks all the boxes.
If you’re into ethical investing, the fact that the majority of ETFs reveal the assets they contain from day to day as a matter of course will be reassuring.
Getting started with ETFs
If you are looking to leverage the aforementioned advantages of this type of fund, there are a few ways to go about it, such as:
1. Use an app like SoFi to invest in ETFs
It’s possible to easily trade stocks online with SoFi, and ETFs are covered by this platform, along with many other asset classes.
Modern trading solutions empower investors by putting them in touch with up to the minute info on the market, and letting them manage their own portfolio if they please, or offload this to a dedicated trader if they’d prefer.
2. Pick which ETFs to invest in
There are a couple of main categories of ETF to consider; passive and active. Passive funds just track the index, while active funds are managed in order to do better than the market over a given period.
Passive ETFs have the upside of the lowest fees, but might not perform as impressively as actively managed counterparts. It’s a case of considering what your own investment goals are, and looking at the timeframe over which you want to keep your money in the market.
Another decision point regards the kinds of assets that are contained in the ETF you select. While there is a good amount of diversity in most cases, as discussed, individual ETFs can be weighted towards a particular type of asset, whether that’s focusing on large Western corporations, or smaller companies in emerging markets.
There are even ETFs which are geared towards particular industries, whether that’s real estate, tech or anything else.
3. Sit back and watch the magic happen
With an ETF investment, you’re not looking to see major gains overnight. Rather you want a safe, inexpensive place for your money to grow and work for you, without needing to constantly be making trades or checking your portfolio.
Like many good investment strategies, this is one which takes a long term view of the market, and anticipates a general upward trend over the course of years and decades.
ETFs are a buy and hold prospect, and don’t have the same excitement or glamor attached to them as certain other investment products.
That said, there’s a lot of merit to investing in them as part of a wider portfolio, especially if you want a solid foundation for your long term planning.
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Author: Claire Ward