Breaking down ETFs
An ETF is a type of fund that takes ownership of the underlying assets (which can include; shares of stock, bonds, bars of gold, currencies etc) then divides the ownership of the said assets into shares. Shareholders have no direct claim nor do they directly own the investments in the funds. Instead, they own these assets indirectly.
The shareholders are entitled to a portion of the profits made can which include earned interest or dividends paid. Additionally, they may be entitled to a residual value should the investment funds be liquidated. Ownership of the funds can easily be transferred in about the same time as shares of a stock since they are traded on public stock exchanges.
Benefits of ETF
1) Low annual taxable distribution.
Since they trade less frequently than mutual funds, ETFs attract a lower annual taxable distribution charges.
2) Diversification.
Unlike a stock, one ETF contains a group of stocks such that with one share of ETF, a person owns stock in multiple companies.
3) Lower expense ratios and passive management.
Compared to other forms of managed funds, an ETF is passively managed and has a low expense ratio as opposed to a mutual funds which has a higher ratio due to costs such as management fee, shareholder accounting expenses, service fee and such.
4) Transparency.
Legally, mutual funds are obligated to announce their holdings quarterly. ETFs let investors see their holdings daily.
Drawbacks of ETF
1) The actual cost might be higher.
Trading an ETFs is normally compared with other pools of stock like a mutual fund. However, compared to investing in a specific stock, the cost might be higher.
2) Dividend yields.
You can select the stock which yields the highest dividend, but ETFs maintain track of a broad market therefore, the overall yield will average out to a lower figure.
3) Leveraged returns.
Some ETFs which may be double or triple leveraged could result in the loss of more than double or triple the tracked index.
Follow this link for more advantages and disadvantages of ETFs: http://www.revenueshares.com/retail-clients/etf-basics/etf-advantages-and-disadvantages/
Bottom line
Used by a range of investors to build a portfolio or attain exposure to certain specific sectors, ETFs have a range of benefits over managed funds such as mutual funds with the biggest one arguably being that they trade like stock. However, there are also some disadvantages to take into consideration before placing an order to purchase this investment.
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- Russell Wild
- Publisher: For Dummies
- Edition no. 0 (10/26/2015)
- John C. Bogle
- Publisher: Wiley
- Edition no. 2 (10/16/2017)
- David Schneider
- Publisher: CreateSpace Independent Publishing Platform
- Paperback: 168 pages
Last update on 2020-03-19 / Affiliate links / Images from Amazon Product Advertising API
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