When you start investing in the stock market, explore the investment instruments. Some are designed for future planning, some are for return optimization, and some are best for generating passive income. It is difficult to find an instrument that offers all the benefits in one package, although ETFs come very close.
What are ETFs?
ETFs or Exchange Traded Funds are pooled investment securities that track a particular index, asset, sector, or commodity. A single unit of ETF contains multiple stocks, bonds, currencies, or other assets selected based on an underlying index. While they behave like mutual funds, they can be directly bought or sold on a stock exchange like a typical stock.
Why Should You Include ETFs In Your Investment Strategy?
Due to their unique investment approach and close tracking of the underlying index, ETFs have gained popularity amongst new and seasoned investors alike. Here are five reasons why you should also be including ETFs in your online investing portfolio:
ETFs are managed by dedicated fund managers who buy and sell securities to outperform predefined benchmarks. However, minimal tracking is required for an ETF to track its underlying index. The fund manager’s participation, therefore, becomes limited, and your investments are protected from human error and emotional bias.
Risk Management and Diversification
When you invest in ETFs, you get the benefit of a diversified portfolio, and your risk is substantially reduced. Since every ETF unit contains multiple securities, if one sector declines, its impact on your holdings can be mitigated by other sectors that are stable. It also improves your net rate of returns.
Many investors also prefer to invest in ETFs due to their dividend regularity. ETFs payout both qualified and unqualified dividends every quarter. It makes them a great investment instrument for generating passive income from the onset.
As ETFs can be bought and sold on the exchange and are passively managed, their overhead administrative costs such as transaction load are relatively lower than mutual funds. Furthermore, you only need to pay applicable tax on your capital gains when you sell your ETF holdings. It makes ETFs economical to buy and maintain in your portfolio.
There is no lock-in period or minimum investment period applicable because ETFs are open-ended funds. No tax benefits are linked with holding on to an ETF for a specific term. Therefore, whenever you need to liquidate your investments for another financial opportunity or emergency, you can divest from your ETF investments. There are no hidden divestment fees either if you are investing online.
In conclusion, if you are looking to include investment products in your portfolio that are easy to understand, can be passively managed, and offer the diversification, then ETFs are for you. While devising your investment strategy, you must invest in ETFs and enjoy their numerous benefits.