Why ETFs should be part of everyone’s portfolio
Exchange-traded funds as an investment vehicle is first created in the United States in the year 1993, over the years it has grow popular with investors, small and big alike, due to its low expense ratio, diversification at a low cost, diversification at a small capital, tax efficiency, and stock-like features. By this, I mean those cash based ETFs, not some actively managed, exotic and sophisticated sway based, leveraged or inverse versions. Here are some compelling reasons why ETFs should be part and parcel of everyone’s portfolio. This is especially so given that a particular place is populated with commission based financial advisers and it is against their interests to recommend ETFs to clients.
1. Incur low fees and charges
Unlike mutual funds and unit trusts, where there are high management fees, together with performance fees that need to be paid when the fund is doing well but no non-performance fees credited to you when things cork up and fund is not doing well. Due to the fact that ETFs is traded like a stock, one only need to pay brokerage commissions and exchange charges during selling and buying of ETFs, plus the fact that management fees for ETFs is relatively low compared to mutual funds.
Low expense ratio simply means that investors will have more money to invest at the end of the day.
2. ETFs give out dividends
There are ETFs funds that yield dividends to investors. While some directly gives out dividends from underlying assets to shareholders, those that did not is due to fund managers deciding whether to re-invest same dividends or distributed to investors. This makes it no difference from individual stocks for those intending to invest for cash flow.
3. Liquidity also exists in ETFs market, diversification at a low cost, diversification with a low capital
For ETFs tracking large and well known blue chips like S&P500 and STI, liquidity definitely exists for both the ETFs itself and its underlying assets. Since many small time investors will be adverse to the focus and value investing style of Warren Buffett, they will want to diversify their investment capital into different stocks as well as asset classes. However, at the same time, the same people will not have the capital size needed to diversity adequately, especially when it comes to blue chips. This is where ETFs can help where one unit is equivalent to all stocks in the index and is affordable to many.
4. ETFs is a simple and non-complex product
Theoretically speaking, ETFs is a simple to understand investment vehicle, for cash based ETFs, where one unit of ETF is equivalent to 500 companies of S&P500, or 30 companies for the case of STI. What is complex is some exotic and sophisticated sway based, leveraged or inverse versions. Those should not lump them together, especially for a governmental financial regulatory authority, unless of course, it also coincidentally owns a bank and the bank needs to sell mutual funds and unit trusts to generate more revenue, hence will have to do something to prevent the popularity of cash based ETFs – a relatively simple and non-complex product.
Cash based ETFs is simply those where your invested capital is backed up by shares of underlying companies as assets. The only time when you lose the whole of your capital is when all the stocks of the companies’ trade at zero dollar value. This is not the same for sway based, leveraged or inverse versions, where things can get complicated.
5. ETFs can expose you to every single market imaginable
At this day and age, due to the benefits and advantages conferred by ETFs, which eventually leads to its popularity, means that there are just about an ETF for every continent, geographic region, country, major index, sectors, industries, asset class, and niche area that one can possibly imagine, to suit the personality and risk profile of everyone. In other words, an entire portfolio diversified until cannot diversified can be constructed easily, quickly and cost effectively by simply using ETFs alone.
In addition, as a specific country’s key index, such as S&P500 for United States, Hang Seng Index for Hong Kong and Straits Times Index for Singapore, aims to provide a reflection of the market and economic composition for that country, index providers will have to adjust companies in index in order to provide and maintain this relevance. Due to this requirement, there is no additional effort or cost to ETFs investors for ETFs that seeks to mirror the returns of these indexes.
Related posts:
