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Dividend Investor
Dividend Investor
Articles (2)  | Author's Website |

Role of Exchange Traded Funds In Investing

March 16, 2013

Exchange Traded Funds (ETFs) allow immediate divarication for smaller investors. This means that ETFs trade like stocks. ETFs have all the benefits of plain old index funds. Exchange Traded Funds are similar to mutual funds. ETFs can be bought and sold on an intraday securities exchange and can be composed of a basket of securities. ETFs are traded at the same price of the net asset value of the underlying assets. They represent an underlying instrument group with a common “theme,” i.e. currency, health services, geographic region, gold, oil, financial services or a particular index. This is an investment fund that is traded on the stock exchanges and holds assets such as bonds, stocks, commodities and net asset value over the course of the trading day. This can be an attractive investment for the investors because of its low cost, tax efficiency, and stock-like figures. ETFs are one of the most popular types of Exchange Traded products.

Importance of Exchange Traded Funds

ETFs have the benefit of picking individual dividend stocks that every investor wants. Investors can protect themselves against volatility with ETFs. This fund is full of advantages some of them are:

· Most of the ETFs are indexed, so they will perform better than actively managed mutual funds. They can also beat out mutual funds.

· The expense ratios of ETFs are much lower, in an approximate range of 0.25% - 0.75%. This can be bought or sold in as little as one-share increments. Their shares can be purchased on margin and sold short as they are publicly traded securities.

· ETFs have the opportunities for option and short-selling because they are traded on a securities exchange. They are also beneficial in the way of transparency. They have transparent portfolios and are priced at frequent intervals throughout the trading day. ETFs are completely transparent so that investors have the advantage of seeing which securities are held in ETF.

· ETFs have the low turnover of their portfolios securities so they generate low capital gains. They can be shared with other index funds and theirs tax efficiency is further enhanced because they don’t have to sell securities to meet investor redemptions. Their tax gain distributions are more frequent with mutual funds.

· By investing in this fund, investors can get the benefit of rebalancing their portfolio in an economical way. This fund provides verities of markets, i.e., broad-based indices, broad-based international and country specific indices, bond indices, and commodities.

· Some investors also can invest in Exchange Traded Fund shares as a long-term investment. These funds frequently implement the market timing of investment strategies.

How to get an ETF

You can buy the ETFs everywhere you can buy a stock. They can also be purchased by a broker or a broker account. It is also very important before committing a brokerage firm that you must make sure that the firm is offering everything you are looking for. When you want a high quality ETF that can fit into your investment, you should evaluate ETFs in the same way like any other mutual fund. As an investor you should avoid those ETFs that track esoteric benchmarks. Always remember to consider the costs before investing in the ETFs, the expense ratio can tell you the cost of an ETF.


As ETFs trade like stocks, investors can buy and sell the shares on an exchange at a determined price by demand and supply, but they must pay the brokerage commissions every time. The ETFs' market price can be different from the net asset value.

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