Welcome to Garv Financial, my name is Gaurav Bhola. The tutorial is on How Exchange Traded Funds Work Part II. Benefits of ETF’s, the four main benefits of exchange traded funds such as advantage over stocks, diversification, the inherent low expense ratios, and tax efficiency. Diversification, exchange traded are great way to create diversified portfolios. There are several hundred exchange traded funds that cover every major index such as the NASDAQ, S&P 500, Dow Jones and more. Also every sector of the market is covered including large caps, small caps, growth, value and more. Furthermore, ETF’s offer and investment opportunities in regions such as America and merger markets, countries specific such as China, India, Brazil; specific industries such as financial, energy, technology and niche markets such as gold and Ritz.
Low expense ratios, exchange traded funds are costs effective investment options. They give you the benefit of index funds such as broad diversification and low turn over. ETF’s costs much less than index funds in terms of expenses, a typical exchange traded fund as an expense ratio between 5 to 30 basis points while a comparable major fund may be basis point of 30 or more. One important thing to remember that low expense ratios can be negated by brook ridge commissions, meaning if you do a lot of trading the savings you get by having the low ETF expenses are off set by the huge commissions you’ve paid your broker. Trades like stocks, ETF are flexible like stocks and the prices fluctuate throughout the day. Additionally, by purchasing ETF’s you are leveraging the entire market or sector instead of just one stock. Also, ETF’s are for benefits for long terms of investors as well as active investors.
And as I mentioned earlier you can basically levers the entire market with purchase of an ETF. Tax efficiency, ETF’s somehow a becoming more and more popular among tax, conscious investors. The unique structures of ETF’s enable large volume trades with the ability to receive in kind redemptions. What that means is that as a large investor you can postpone your tax liability by redeeming your ETF for underlying shares of stocks that the ETF tracks. Moreover, you can choose an ETF that doesn’t have huge capital gain distributions or piece dividends along further, tax liability management. The disadvantages of exchange traded funds, there are some disadvantages of exchange traded funds however the advantages out way to disadvantages. Disadvantages concern ETF’s are possible excessive brokers costs of market pricing of ETF’s dividend reinvestment plans and the ability to purchase at lots.
Broker’s costs, each time you trade an ETF the commission is paid. Once you start paying excessive commissions, you start negating the benefits of the law expense ratios that accompany ETF’s. Market prices, mutual fund prices are determine at the end of the day at net asset value. Meanwhile ETF prices fluctuate into a day, similar to stocks over the ETF price doesn’t reflect the true value of the underlining assets. Dividend reinvestment plans, exchange trade funds unlike mutual funds do not permit reinvestment of dividends. Add lots, you can buy and sell exchange credit funds in add lots however some ETF may not permit the trade of add lots. Such as Maryland Shoulders, holders are registered in a different manner than other ETF’s hinds a line trades in only one lots. Now it is understandable why the popularity of ETF’s has been to amends since their introduction in 1993. The benefits of cost of ownership are low and offer amends choice and flexibility in investment areas. My name is Gaurav Bhola, thank you for watching why Exchange Traded Funds Work Part II. More financial tutorials are available at gravfinancial.com.
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