Why should you invest in ETFs?
Since their inception nearly three decades ago, ETFs have been growing exponentially, reaching a staggering $7.736 trillion by the end of last year, according to Statista.
One of the most popular ETFs in the US, Vanguard S&P 500 ETF, has produced an average annual return of 15.32% in the last ten years (2010–2020). So, $1,000 invested a decade ago would be more than 4 times in value today.
The SPDR S&P 500 ETF Trust (SPY) is yet another example of the popular ETFs Today. It is one of the largest and most heavily traded ETFs globally, offering exposure to one of the most well-known equity benchmarks.
SPY’s returns have beat the average return of many other large blend funds in the last ten years with a four-star Morningstar rating. This ETF has generated an average 3-year return of 13.25% through December 2020.
Based on trailing 10-year data, the SPY generated average annual returns of 13.55%. Since its inception back in 1993, the fund has achieved average annual returns of 9.96%.
Exchange-Traded Funds, commonly known as ETFs, have several features that make them an excellent investment for you over other financial securities such as mutual funds, direct stocks, and bonds.
They have emerged as a popular investment choice, particularly during the COVID-19 era as more investors turned to ETFs to hedge portfolios, efficiently rebalance holdings, and manage unforeseen risks.
There are many good reasons for you to diversify your investment portfolio with ETFs. Here are some of them.
1. ETFs Offer Liquidity
Let me start by telling you what liquidity is.
Simply put, liquidity is essentially how easy it is to turn your investment into cash when it’s time to sell shares.
That said, ETFs are as liquid as they come and can be traded throughout the day. For this reason, you can always exit the market at any time if you feel that your investment is losing to preserve capital.
The ample liquidity provided by this type of security also means that you can use your shares for intraday trading, just as is the case with stocks.
2. ETFs Carry Lower Costs
Whether you invest in ETFs or mutual funds, you’ll have to pay some fees.
After all, someone has to create these funds and manage them so that they follow the plan outlined in the prospectus.
That person or team needs to be paid for their work, and their salaries can be pretty high. And not to forget, making the trades also attracts costs.
If you want to get an idea regarding the expenses you’ll incur, be sure to check a fund’s expense ratio.
That said, ETFs generally have lower expense ratios than mutual funds.
And why is that?
For one, the fees for buying them are often lower. Another reason is that they have negligible commissions or management fees, which makes them relatively cheaper compared to mutual funds.
Moreover, you can easily avoid accumulating commission fees with ETFs since there is only one transaction per trade, unlike regular equity trading that requires you to add a basket of stocks to your portfolio.
3. ETFs Allow for Portfolio Diversification
Diversifying your portfolio is an excellent way of managing risk.
After all, with multiple investment vehicles trading in your single ETF, you get to minimize the risk of going wrong with one single security.
ETFs allow you to hold various types of securities and investments from different issuers and industries.
As the popularity of ETFs increases, the range of available ETFs has broadened to encompass literally every asset class, from stocks and bonds to real estate, international investments, commodities, and currencies.
Given this, when you invest in ETFs, you gain exposure to different market segments, both in your country or globally.
4. ETFs Help You Save on Tax
Photo by The New York Public Library on Unsplash
To the tax-man, ETFs and mutual funds are the same.
But the structure of ETFs makes them more tax-efficient than mutual funds, whether you’re trading in the US or Hong Kong stock markets.
ETFs typically accrue fewer taxes on capital gains than mutual funds.
On top of that, the capital gains tax on an ETF is payable when selling your investment, whereas, in mutual funds, the taxes pass on to the next investor, and so on, for the entire life of the fund.
These two factors make ETFs a cheaper- and perhaps more sensible- vehicle to buy and hold assets in diverse markets and classes, especially if you’re a beginner investor.
5. You Can Buy ETFs as One Investment
Say you have saved up some money and want to buy various assets in the stock market.
How do you begin choosing what stocks or investments to buy?
Picking the best securities for a solid portfolio can be pretty challenging, even if you have some experience with the stock market.
ETFs save you this struggle, making it possible to buy various investments with just one transaction.
The hardest part is already done for you, and your only job is to figure out what ETF you want to buy.
This model also makes it easy to monitor your investment.
6. ETFs Ensure That You’re Staying Current
The financial market is ever-changing, and ETF issuers are known to stay ahead of the tide.
In the last few years, ETF providers have responded swiftly to the demand for different investment products.
This is perhaps part of the reason ETFs have grown so much in the last few years.
ETFs could be a great place to start as a young investor looking to stay on top of the trends.
Final Thought
If you’ve been thinking about investing wisely but aren’t sure what to pick, ETFs are a good way to get yourself started.
I hope you got some valuable pointers from this article. If you want to learn more about how to reclaim your emotional, spiritual and financial sovereignty, be sure to check out my pages / YouTube channel.
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