4 Reasons to Consider ETF as Your Important Investment Option

Mutual Funds and Exchange Trading Funds or ETFs definitely have a lot of things in common, and so people are often confused as to which one they should choose for investing their money. Are you not sure about investing in an ETF as well? This article will show you why ETF should be considered as an investment option by more and more people.

What is ETF, and how is it different from mutual funds?

The ETF-mutual fund confusion can be cleared out by simply stating the difference between these two. Both being diversified investment options, will help you to put your money into different security baskets but with a single investment plan. But the difference is that –

• ETFs trade in between the day while mutual funds do not. The latter usually trades at the end of the day.
• You cannot make stock orders with mutual funds but with ETFs.
• The expense ratios of ETFs are quite lower as compared to that of mutual funds.

Why should you invest in ETFs?

You should invest your money in an ETF because of the several benefits associated with it –

• Investment flexibility – The flexibility that you get by investing in an ETF is unmatched. Their trade takes place all throughout the day in the market hours. Multiple ETFs are released into the market every day, and all of them belong to different categories including gold ETF, style ETF and commodity ETF. You can check the gold ETF price along with the price of other ETFs throughout the day as the prices will keep fluctuating thus behaving similar to stock market equities.
• Cost-effective – This is one of the major advantages of investing in an ETF. This is because there will be only one transaction per trade, and so commissions and managing fees are much lower than mutual funds. Since ETFs are not meant to outperform their index, they do not follow an aggressive management strategy. Instead, they only require some minor changes. This is why their management costs are lower as well.
• Simplicity – ETFs can be a good option for those who are beginners in the world of investment. Buying an ETF involves one single transaction. But when it comes to mutual funds, there will be multiple trades and multiple prices to hit the target mark and get the desired gains.
• Tax Benefits – Want to keep your tax bill low? Then ETFs are definitely a good option over mutual funds. Due to the structural differences that ETFs have with mutual funds, they incur lesser capital gains. Moreover, the tax on capital gains in case of an ETF will be incurred by you only when you decide to sell it, but in case of mutual funds, these taxes will be passed on for the whole life of the investment.

Investing in an ETF will definitely benefit your portfolio, so weigh out the pros and cons of both mutual funds and ETFs and then make your decision.