What are the benefits of investing in ETFs?
With ETFs, you can build a substantial fortune without investing a lot of time. But what are the biggest advantages of ETFs or exchange traded funds? In this article, we discuss them in detail!
Advantage 1: Diversification
A major advantage of ETFs is the high degree of diversification they offer. With one ETF, you can invest in as many as 4,500 different stocks! By investing in a larger selection of stocks, you can avoid losing a large portion of your wealth due to one company performing poorly.
However, it is important to research whether an ETF is truly well-diversified. You can do this by looking at the weight of different companies and sectors within the fund.
Advantage 2: As easy to trade as a stock
Another great advantage of an ETF is that it is easy to trade. Unlike some mutual funds, you can sell an ETF at the prevailing price at any time. Because an ETF is tradable like a stock, you can also trade on margin or open a short position.
Furthermore, ETFs often have high liquidity, making it easy to find a buyer.
Advantage 3: Low Costs
The costs of an ETF are typically much lower compared to other investment products. You can quickly pay between one and two percent in management fees for an actively managed fund. Even when you buy shares yourself, you pay transaction costs for each one.
This is not the case with an ETF. An ETF is passively managed, so annual costs are typically half a percent or less. Because a large ETF buys large quantities of shares at once, you also benefit from lower transaction costs than if you were to buy the shares yourself.
Advantage 4: Access to exotic markets
You can also use ETFs to access more exotic markets. For example, it is very difficult to buy stocks in emerging markets yourself. However, if you use an ETF, you can invest in a basket of African or Asian companies all at once. With ETFs, you can also speculate on commodity prices or cryptocurrencies, among other things.
Advantage 5: Transparent
Because ETFs are freely tradable, price formation is very transparent. Mutual funds are sometimes traded at a premium or a discount. This is rarely the case with an ETF: when the ETF becomes worth less or more than the underlying securities, shrewd buyers and sellers quickly correct this. This transparency ensures that you always know the value of your investments.
Advantage 6: You save time
Another advantage of investing in ETFs is that it saves a lot of time. When you buy stocks yourself, you have to do a lot of research, which takes time. However, research has shown that active investors rarely achieve good results.
By investing in ETFs, you don’t have to constantly think about your investments, allowing you to use that time for other things.
Advantage 7: benefit from an average return
By investing in ETFs, you can benefit from the average return on a market over a certain period. You can periodically invest a fixed amount, which is also called dollar cost averaging.
This way, you actually apply the perfect diversification: you can’t enter at the wrong time. You invest money at both low and high prices.
Advantage 8: investing in ETFs is easy
Compared to more complex investment products, it is easy to invest in ETFs. All you have to do is open an account with an online broker, and you can get started right away. Curious about which brokers you can turn to? Check out the overview of the best brokers.
Advantage 9: physical ETF is a safe structure
When you invest in a physical ETF, you benefit from a safe structure. You can then be sure that the fund actually holds the securities, so that the price of the fund moves with that of the underlying securities. This is recommended in relation to a synthetic replication, where you follow an index with complex derivative constructions.
Advantage 10: tax benefits
You may encounter dividend leakage with ETFs when the fund is located abroad. The fund may then not always be able to recover all overpaid taxes. Therefore, it can be extra attractive to invest in a fund that is based in the Netherlands.
