Top 5 Reasons to Invest in an ETF

In 1993, there was only one ETF available to the public. The SPDR exchange-traded fund, which tracks the S&P 500 index, was the ETF that got it all started. When this offering was brought to the public, it didn't exactly become a hit overnight. In fact, there wasn't even a second ETF offered until 1995. Fast forward to today and there are more than 800 ETFs offered that span every sector in the market and every region of the world. Simply put, the ETF is taking the financial world by storm in the last few years. There is not a hotter product on Wall Street. What makes the ETF so wildly popular? Why should you invest in an ETF? Let's take a look at the five top reasons to invest in an ETF.

Top Five Reasons to Invest in an ETF

Cost Efficient- If you are looking for cost-efficiency then the ETF is tough to beat. There is only one transaction per trade, which means all you have to do is pay the transaction fee to the brokerage where buy or sell the ETF. An ETF comes without loads, unlike many mutual funds. Also, the overall expense ratio of an ETF will always be much lower than that of their mutual fund counterparts.

Flexibility- The ETF is an investment that comes with an amazing amount of flexibility. An ETF trades just like a stock, which means prices are continuously updated throughout the day. It also means you are able to buy or sell the ETF at any time, rather than needing to wait for the transaction to occur after the close of the day. Don't complicate the picture, just realize that an ETF trades exactly like a normal equity in the stock market.

Access to Multiple Investment Classes- Before the ETF came around; it was very difficult for the average investor to invest in many assets that play a huge role in the current world economy. With an ETF, investing in commodities such as gold and oil is simple. Foreign markets that were virtually inaccessible before are now widely available to every investor through emerging market ETFs.

Tax Efficient- Capital gains taxes on an ETF are generally much lower than those of a mutual fund. This is because in an exchange-traded fund capital gains are not realized until the assets are sold with the entire fund. In a mutual fund, capital gains taxes are incurred immediately. Not only are ETFs cost-efficient upfront, but there also tax-efficient.

Diversification- The ability to diversify your portfolio by purchasing one ETF is a huge benefit. Like a mutual fund, an ETF is able to allow you to own multiple companies with the purchase of one security. For the individual investor, this makes becoming diversified a much easier process. Diversification is the best way to be successful in the market, and an ETF can help diversify your investment portfolio instantly.

Sources:

Yahoo Finance "How ETFs Work"

Investopedia "Exchange-Traded Fund Definition"

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