Benefits of ETF
ETF denotes Exchange Traded Fund and it fundamentally holds various assets like stocks or bonds with its net value being equal to the negotiable instruments it holds. ETFs are also regarded as investment portfolios that hold stocks and other key negotiable instruments traded on the stock exchange. A key distinction between ETFs and stocks is that ETFs can track and also index. This explains why ETFs are also known as index funds. You can effectively track many indexes through ETFs. Discussed here below are the advantages of using ETFs.
Advantages of ETFs
1. Low operation costs
One apparent ETF benefit is that it has a low operating cost. This following example should illustrate this benefit clearly. The VIPER, a popular ETF, tracks the entire index for the American stock market and carries a yearly operating expense on only 0.06% of the whole assets. Simply put, a large investment of $10,000 in an ETF would have a yearly operating expense of only seven dollars.
2. Tax efficiency
ETFs are well structured to provide tax efficiency since the ETFs themselves do not have to sell or buy securities. This means there are no taxable gains that will be then passed on. Furthermore, ETFs can produce taxable gains; however exchange trade funds are usually sold like stocks. Hence, for investors to realize profits, they would require trading the ETFs or selling the shares so as to reflect adjustments in underlying index.
ETFs are quite flexible when contrasted against other kinds of investment like mutual funds. Mutual funds are charged once only and this occurs at the close of trading. However, ETFs are flexible in that they can be sold or bought just the way you would normally deal in stocks. This means you can purchase on margin or you can sell short if the market situation is suitable.