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Why Use Exchange Traded Fund or ETF Securities

An Exchange Traded Fund (ETF) security offers many benefits to investors seeking to build a growing portfolio. If you are looking for ways to build, or rebuild you investment portfolio, ETF’s should be high on your list. ETF’s are a basket of securities that track an index that measures a segment of the economy or the market. As their name implies, an Exchange Traded Fund trades like a stock on a stock exchange.

For example, you can own all the shares in the S&P 500 index through an ETF. State Street has created the S&P 500 SPDR (SPY) Exchange Traded Fund that mirrors the S&P 500 index. This ETF security gives you the ability to own a piece of the S&P 500.

Maybe you prefer to invest in the technology sector. Once again, there are ETF’s that provide this capability. The Select Sector Technology SPDR (XLK) owns shares of the S&P technology index giving you exposure to this important sector of the market.

What about asset classes, such as commodities. Many investors fear investing in commodities, yet they have an informed opinion on some of these assets. Let’s say you believe that the demand for food is growing as more people throughout the world are eating better. You could buy the Powershares Commodity Trust Fund (DBA) ETF, which owns equal amounts of four important food commodities – corn, soy beans, wheat and sugar. This ETF security gives you an ability to own these commodities without worrying about taking delivery of a truck load of soybeans.

To help you understand ETF securities a little better, here are five reasons you should consider them as part of your portfolio.

  1. ETF’s can be safer than stocks. Since ETF’s are a basket of underlying securities, there is less risk owning an ETF than owning one stock. Individual corporate events such as corporate scandals, poor earnings report, product liability or government investigations can cause the price of stock to plunge. ETF’s offer diversification to offset the risk of owning individual stocks.
  2. ETF’s offer some advantages over mutual funds. Like index funds, ETF securities are not actively managed so they do not incur the extra costs associated with many mutual funds. Some mutual funds charge 3 or 4% of the assets each year, whether they make or lose money. ETF’s also charge a fee, though it is much lower and can be only 0.15% of the assets. That extra money goes into your pocket. In addition, with mutual funds the investors pays taxes on any gains incurred by the fund when they sell stock in their holdings. Holders of ETF’s only incur capital gains when they sell their ETF shares giving you more control over when you incur a taxable event.
  3. ETF’s offer multiple asset types. Investing companies have created ETF’s for many types of assets. For example, there are ETF’s for industry sectors, commodities, currencies, emerging markets and individual countries. As a result, you can create a portfolio with exposure to multiple asset classes that take advantage of your expectations for price appreciation. In addition, these broader investing opportunities provide you additional ways to diversify your asset base.
  4. ETF’s are available on the long and the short side. Most investors think of investing as buying shares of a stock expecting it to rise, so they can realize capital gains. This works well when the market is trending up. When the market is trending down, many investors are reluctant to short a stock. Now there are ETF’s that offer you a way to short the market without having to short individual stocks. You can buy these short ETF’s in anticipation that the market will trend down and participate in the fall in the market. These short ETF’s are popular with many traders, especially the ones that offer two or more times the move of the underlying index. These short ETF’s enable you participate in down trends of the stock market.
  5. ETF’s are transparent. You always know what you own. ETF’s own shares of an asset based on an index such as the S&P 500. The index establishes the mix of underlying securities. ETF’s own the securities that comprise the index. As a result, you can always see what assets comprise the index. This transparency provides you additional comfort that your investment is not subject to manipulation.

ETF’s offer you greater flexibility and investing opportunities to help build your financial portfolio. Take some time to learn more about ETF securities, so you can enhance your investing results.

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