Exchange-traded funds (ETFs) have been around for more than 30 years. Their continued, and increasing, popularity should come as no surprise. ETFs provide investors a low-cost and convenient way to gain exposure to the markets.
They offer four distinct benefits:
Low cost is arguably the most well-documented benefit of ETFs
The cost saving of ETFs stems from a variety of factors, including lower operating costs, lower management fees and fewer trading costs associated with this more passive approach to investing. Those lower fees can translate directly into greater savings and growth potential for investors.
ETFs are liquid
Like stocks, ETFs are “traded on an exchange” so they can be bought and sold throughout the day between individual investors. (However, just because you can trade an ETF regularly, doesn’t mean that you have to, or should.) This intraday liquidity provides investors with greater trading flexibility and a dual benefit: they can be used for shorter-term exposure or as part of a long-term investment strategy.
ETFs also offer some tax benefits
Capital gains arise when a security is sold at a higher price relative to the price at which it was purchased. However, due to their more passive approach to investing, there tends to be less turnover of securities within an ETF, resulting in less frequent triggering of capital gains and the potential for lower capital gains distributions at year-end.
Generally, since ETFs are more passively managed and many track an index, they will disclose complete security holdings on a daily basis. This is usually the case for passive ETFs and many strategic beta ETFs. Many active ETF strategies will disclose holdings on a quarterly basis, as is more customary with mutual funds.
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