We like using ETF's in portfolios. They are cheap and flexible. Learn more here

Exchange-traded funds (ETFs): A low-cost alternative

Exchange-traded funds (ETFs) are attracting ever greater attention from investors. They continue to grow globally, with assets of more than USD 1.9 trillion. We like using ETF's in portfolio's and the cost to run them is very competitive, most platforms are also using them so the cost is coming down further.

What are ETFs?

An ETF is an open-ended fund quoted for trading on a securities exchange. Generally ETFs are constructed as indexed portfolios of stocks, bonds or real estate securities. Similar to individual stocks, ETFs can be bought and sold through brokerage accounts during market hours at intraday prices, rather than at end-of-day prices as with unlisted managed funds.

Like index mutual funds, ETFs offer diversification benefits and low fees, but with the added benefits of liquidity and trading flexibility of individual stocks. (Figure 1) 

 

The benefits of using ETFs

ETFs' characteristics and potential benefits include:

  • Low costs. ETFs generally have lower total expense ratios, or annual operating costs as a percentage of average net assets, than actively managed funds. Lower costs mean more of a fund's returns go to the investor.
  • Trading flexibility. ETFs are traded on a stock exchange, so they can be bought and sold through an adviser or a brokerage account any time the exchange is open.
  • Diversification. An ETF might contain hundreds or thousands of securities, more than many actively managed funds and far more than a typical portfolio of individual securities. Diversification helps to control risk by reducing the impact of swings in performance by any one security or market segment.
  • Transparency. Most ETFs hold the same securities, or a representative sample, as their benchmark indices, so you'll always know what you're investing in.
  • Low manager risk. Index-based ETFs virtually eliminate exposure to manager risk. That's because they seek to track, not outperform, a market index.

Why ETFs?

ETFs offer easy access to securities markets,whether your orders are big or small.They’re diversified like mutual funds, but can cost far less to own.

And because ETFs trade like single stocks, you can take advantage of flexible order types such as limit orders – where a trade is executed only at a specified price or better.

Whether you aim to build a broadly diversified portfolio or to strategically address portfolio imbalances, their flexibility and low cost can make ETFs an appropriate investment vehicle.

Diversification through ETFs

If you are looking to create diversified portfolios or improve diversification within your portfolio then you may benefit from holding ETFs. ETFs can offer a diversified investment that seeks to track all or a representative sample of a benchmark index.

An ETF might contain hundreds or even thousands of securities – more than many actively managed funds and far more than a typical portfolio of individual securities. So ETFs offer diversification that you may not be able to achieve otherwise.

Keep in mind, however, that all investing is subject to risk, and that diversification does not ensure a profit or protect against a loss in a declining market.

Source: Vanguard