Why ETFs are Best Choice?
There are a lot of benefits that comes with choosing ETF, however one of the main benefit is that they are the key to well balanced portfolio, without costing lot of money.
Furthermore, they also allow the investor to change his portfolio as a response to the changing circumstances. In simple words, ETF allows the investor to have diversified portfolio.
Are ETF flexible?
ETFs are not similar to mutual funds that are typically priced after the market is closed. ETFs are priced throughout the day since their trade continues to roll the entire day.
An ETF can be sold short, bought on the margin, or held for a long time.
Since the value of ETF is based on underlying index, the ETF have additional advantages of offering huge diversification as compared to holding shares in any single company.
This quality of ETF makes it highly flexible.
Important Factors If You compare ETFs?
There are a lot of important factors that one need to keep in mind when it comes to investing in different ETFs.
The most important factors are mentioned below:
- Tracking Error
- Replication Method
How To Determine Liquidity?
If an ETF can be sold or bought at any time without a huge discount or market from market price, it has very high liquidity.
ETFs liquidity is not dependent only on the volume of individual trading but also on the fact that how difficult is the buying as well as selling of the investments that are underlying traded index.
The securities with low liquidity and lower trading volume are not necessarily part of the ETF, which results in tracking error.
How Costly "Investing in ETF" Can Be?
Buying & selling cost of ETFs is something that the investors should know before investing in ETF. Their transaction cost is inclusive of brokerage fees, as ETFs are basically traded on exchange.
Moreover, when it comes to liquidity of the ETF, it has significant effect of amount of bid-ask spread, which means there will be another cost factor that the investor should consider.
ETF issuers also charge certain annual fees in the name of ETF management. This fee is not part of buying and selling cost.
However, this management fees are comparatively lower than the other funds that are actively managing.
Furthermore, the ETF investor should also keep in mind that when it comes to buying and selling of the ETF, private investors are imposed much higher transactional cost as compared to the professional fund managers.
What Does "Tracking Error" Stands For?
Tracking Error basically is a term that is used to describe difference between index return that are replicated by ETF and ETF yield.
In technical terms, Tracking Error is described as standard deviation of difference between index yield and ETF yield.
ETF however cannot 100% replicate index and there are different reasons behind it e.g. if an index has presence of illiquid securities, it can be extremely expensive to completely replicate it.
How important are ETF sponsors?
There are a huge number of ETF sponsors these days, more likely over a dozen. At times, an exclusive license is given by index manager which is for some particular index.
For that particular index there will be single sponsor who will be offering some product that matches that particular index.
Moreover, for every sponsor there are different policies regarding fees, expenses structure, different marketing levels and willingness to maintain the funds open below some specific level of the assets.
Are REITs and ETFs similar?
A common misconception about ETF is that they are similar to REIT.
Real Estate Investment Trust, also known as REIT, is basically an operating company that has office, employers and routine business operation to manage.
REITs are mandatory by law in order to focus on the buying, managing and developing real estate properties. They are as required by the law to pay a handsome percentage of the total earnings as the dividends. While on the other hand, ETF is not any company.
ETFs (Exchange Traded Funds) are basically fund that are established by some fund sponsor and are designed to hold assets including bonds and stocks.