Great Advantages Of Exchange Traded Funds

by Hank Coleman

There are many advantages of exchange traded funds.There are some limitations to buying and selling shares of mutual funds. However, there are some great advantages of exchange traded funds (ETFs) that investors can use in their portfolio. Because of the way exchange traded funds’ shares are priced, you have more control over your investing and more options when buying and selling shares. Exchange traded funds’ characteristics that are different than traditional mutual funds can be beneficial to investors. An exchange traded fund is a type of security or financial investment that tracks a certain index of the stock market, commodity, or a group of assets much like the way an index fund operations. The one unique aspect of an exchange traded fund is that their shares trade much like a share of stock would trade.

Exchange Traded Funds Prices Move With The Market

Unlike a mutual fund, the share prices for exchange traded funds constantly move with the stock market during the trading day. This is one of the great advantages of exchange traded funds. Mutual funds only adjust their share prices at the end of the trading day when all of their purchases and share selling has been complete. Then their net asset values are recalculated and their share price is updated. Exchange traded funds continue to trade on the open market exactly like shares of stock. The share price moves in tandem with the supply of shares and the demand for those shares. When there is a high demand trying to buy those shares, prices move up immediately to meet that demand. The same happens when investors are selling and no one is there to purchase. Share prices immediately react by coming down until they can find a buyer in the marketplace.

Exchange Traded Funds Give You More Buying Options

Exchange traded funds allow you to invest with the types of purchases that investors are familiar with through buying and selling stocks. An advantage of exchange traded funds offers investors the ability to sell shares short if they think that the underlying asset may be headed lower. Another advantage of exchange traded funds is that investors are able to place limit orders and stop orders when buying and selling shares. This allows investors to have a much better control over the prices that they are willing to accept when buying and selling their shares of exchange traded funds. These are great tools to take your investing to the next level and are an excellent advantages of exchange traded funds.

Exchange Traded Funds Have No Minimum Investment

Many mutual funds have high minimum investment requirements to open a new account. Most typically require investors to initially invest $2,500 or more to open a mutual fund account. Sometimes investors can get this requirement waived if they agree to open an account and fund it using a monthly direct deposit each month from a linked bank account. While this is a great way to dollar cost average your investment, it may not be the optimal way to open a new mutual fund account especially if you have a large lump sum that you are trying to invest. Exchange traded funds allow you to purchase as few amount of shares as you want and even fractions of a share much like you would a share of stock.

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Are exchange trade funds for everyone? Of course they aren’t. There are a few drawbacks to ETFs as well such as commissions and fees if you are purchasing a small quantity of shares or trying to dollar cost average. But, there are some great advantages of exchange traded funds as well that investors can benefit from also.

Have you ever invested in an exchange traded fund? What were your experiences? I’d love to hear your thoughts in the comment section.

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, an Iraq combat veteran, a Dr. Pepper addict, and a self-proclaimed investing junkie. He has written extensively for many nationally known financial websites and publications. Hank holds a Master’s Degree in Finance and a graduate certificate in personal financial planning. Email him directly at Hank[at]MoneyQandA.com.


Hank Coleman has written 585 articles on Money Q&A. Learn more about Money Q&A on Twitter @MoneyQandA and @HankColeman.


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{ 8 comments… read them below or add one }

Hunter - Financially Consumed

Another advantage I read about is their lower management fee cost compared to similarly structure mutual funds. Money Cone presented a great article on this. Nice write-up!

Reply

Hank

Great point, Hunter. Thanks! You are absolutely right about the managment fee. Since many of these funds are essentially index funds, their fees are quite a bit lower.

Reply

Vince Thorne

Low maintenance! ETFs do not have the fees that hedge funds and big investment companies charge. These are not balanced as often managing them is comparitvely less intensive and the owner pays less premium to own them.

Reply

YFS

One major benefit is that you can short them! If you are saavy about options strategies you can make a lot of money play ETF’s. For the buy and hold investor they are more tax efficient and often have lower expense ratio’s. With discount brokers offering free trades you can completely avoid the fee’s for buying and selling.

Reply

funancials

Majority of my personal investing is in my retirement accounts – where I’m extremely satisfied with the performance of my mutual funds.

Reply

funancials

…but ETFs do have their advantages

Reply

Irfan

Great Article 🙂

Reply

Being Investor

Another advantage I read about is their lower management fee cost compared to similarly structure mutual funds. Money Cone presented a great article on this. Nice write-up!

Reply

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