Exchange-traded funds (or EFT for short) have recently become a more and more interesting alternative to classic mutual funds. As of today, there are over 175 EFTs accumulating over 200 billion dollars - and these numbers are growing. While it is improbable for EFT to completely supersede classic mutual funds (at least in the near future), they are an interesting alternative and probably a must-have in every beginners portfolio.
What is EFT?
Basically, an exchange-traded fund is a fund made of a portfolio of stocks from a single market. The portfolio is composed based on an index, industry sector or (more rarely) a country the companies are tied to. There are many stocks in each EFT portfolio, so the risk of the losses is roughly the same as in case of mutual funds. However, the expenses are tied thus keeping EFT funds from going much lower, and the fees charged by EFTs are minimal, giving investors additional income. What's more, EFTs trade like stock, making life easier both for investors and fund managers.
Benefits
1. Low fees
The most obvious strong point of EFTs is their low fees. While lowering them to such levels as 0.2% a year may look like magic, it is completely normal - due to the fact that all the stocks are tied to some single slice of the market, the funds can reduce the amount of money spent on market analyses.
2. Lower taxes
Unlike mutual funds, exchange-traded funds distribute nothing but a dividend from time to time, so there are few reasons to get taxed.
3. They're transparent
You can check real-time what your EFT is actually doing with your money, while mutual funds report their holdings only twice a year.
4. Extra trading opportunities
EFTs are sold just like normal stocks, thus creating many different trading options. Stop-loss and limit orders are but one of many opportunities available only to stock trading.
Switching to EFT
Switching to exchange-traded funds is relatively easy on tax-free accounts, such as IRA (Individual Retirement Account), where you simply cease to invest in mutual funds or stocks and start buying EFTs. However, when we're speaking about taxable accounts, you will have to make a switch only a little at a time to ease the taxation burden on your revenue.
Remember that while Exchange-traded funds are an excellent investing opportunity, it is not without risk, so consult with your Financial Professional before investing, especially if you have a taxed account.
