Exchange-traded funds (ETFs) have become a favoured route for modern investors to find diversification and flexibility in funds, as advantages such as low expense ratios, and no minimum deposit limits can be utilised. There is also a benefit from a taxation perspective, as capital gains tax is exempt from shareholder sales within EFTs, as oppose to mutual funds.
More than 2,400 ETFs are now on the market, with some fantastic options out there as low cost passive investment options. There are also some options that are best avoided. In short, as in most areas of finance, the best option is to seek professional advice, however here is a run-down of favourable ETF strategies that, if implemented correctly, will provide a strong performing passive investment option for the discerning investor.
ETFs of ETFs
Funds of funds is a simple concept that has many benefits, and so long as the attached fees remain feasible, many financial experts swear by this investment strategy. The concept is simple: rather than directly investing in a variety stocks, we invest in a variety of high performing funds. Assuming that the funds are high performing, and the historical data has been verified, this is a method with great potential for low risk returns. However, mutual funds declare dividends and performance results at their own discretion, most commonly once a year. ETFs disclose their holdings on a daily basis, so up-to-date performance records can be considered before investment This is another area of great appeal when considering ETFs.
For example, you can analyse the highest performing existing ETF on the market right now, and understand which asset classes, and specifically which bond ETFs or real estate ETFs they use and gain success from. You can then effectively mirror their choices for yourself.
ETFs are a primary route to accessing a broad range of asset classes at a very low cost. Some top performing ETFs will charge just 0.25% each year, which when you consider the strong mix of US and other foreign stocks that are contained within, is a nominal fee.
Against that, there are ETFs for which the fees verge on the over-inflated, and the strategies difficult to have confidence in. A two weekly review of the portfolio, combined with automatic investment in the top five performing funds run by First Trust Bank, for a fee of just under 1%, may not appeal to all.
The key is to set objectives, decide the best route to achieving these, and select the ETF accordingly with the aid of a financial professional. The real areas for appeal within ETFs, is the passive nature of the investment, and the low fees, both of which give consumer confidence and negate the need for constant concern and review. While ETFs are not a new trend, their popularity has increased dramatically over the last 12 months in the wake of increased consumer awareness and global stability concerns. ETFs have prospered, and that prosperity is waiting to be passed on to acute investors.