The Benefits of Investing in ETFs (Exchange Traded Funds)

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Determining the advantages of exchange-traded funds can help investors make informed decisions regarding their investment portfolio. These funds tend to appeal to investors looking to invest in secure investments without much risk. ETFs are typically low-cost investments and they include a collection of stocks or any other securities that bring the quality of portfolio diversification into any investor’s financial plan.


Exchange-traded funds or ETFs have become popular in recent years as they offer the convenience of investing in a basket of stocks or any other securities in just one trade. Like you trade stock, ETFs can be traded on stock exchanges at any time in a trading day. Of course, although they are quite sought-after as investment instruments, they are not a guarantee of potentially assured returns. Nonetheless, they have features and benefits that appeal to investors, and after knowing what these are, investors may go ahead and invest if they desire. 

Article Highlights

This article about the benefits of exchange traded funds highlights the following:

  • What is an ETF?

  • How ETFs Work 

  • The Benefits of ETFs

What is an ETF?

An ETF or an exchange-traded fund is an investment instrument that invests collected funds in different securities that may comprise, stocks, bonds, an index, or a basket of equity assets. Furthermore, ETFs may also include gold, currency, or oil futures. After the trading account opening process is completed, any investor can go ahead and invest in exchange-traded funds. ETFs are securities that are marketable themselves and can be easily traded on stock exchanges directly, unlike mutual funds. Exchange traded funds are listed and can be transacted on bourses, and hence, they are prone to price volatility just as shares are. Additionally, since ETFs can be bought and sold with convenience, they offer investors liquidity to a greater extent than mutual funds do. 

How ETFs Work

Investing in ETFs is a simple process, and by now, you may have gauged how they work. Nonetheless, going into a bit more depth will help you understand certain nuances of ETFs better. Any ETF represents an underlying asset or a diverse group of securities that can be traded on the stock market. The value of the ETF is, thus, dependent on the value of the underlying assets it holds. If there is any price fluctuation in the assets, there will be corresponding volatility in the ETF. For instance, if an investor holds a gold ETF, any changes in the price of gold will reflect in the ETF shares held by the investor. However, it is pertinent to note that, while ETFs can be traded like stocks, ETFs do not indicate an investor’s stake in a company. Nonetheless, ETFs, depending on the types you invest in, can generate dividend income for those who hold them. 

The Benefits of Exchange Traded Funds

Exchange traded funds were first established in the US, and since then, they have gained marked popularity in terms of investment instruments, especially to diversify a portfolio and mitigate risk. The investment in ETFs can carry key benefits for investors, and these are mentioned below: 

  • Portfolio Diversification 

When an investor buys an ETF, they may invest in a collection of stocks or other securities that may be diverse in terms of sectors or industries. This spreads an investor’s risk and actively mitigates it to some extent. With ETFs, investors can structure a portfolio across geographies and sectors. 

  • Accessibility Due to Affordable Investment 

ETFs give accessibility to different strata of investors as initial investment in ETFs is cost-effective relative to other financial instruments. Expense ratios are potentially low and low management fees deliver potential incremental profits, increasing gains in the long run. With no front load or exit fees, ETFs are appealing to several investors with low investment budgets. 

  • Transparent Investment 

ETFs have to disclose holdings in the fund in question on a daily basis, so investors have an exact idea what they are investing in. While investing in ETFs, investors can also track and monitor investments digitally and be informed and planned as to further steps. 

  • Liquidity in Investment 

ETFs offer investors with a liquidity factor as they can be sold like stocks on exchanges. What’s more, they can, like stocks, be bought and sold during anytime when the exchanges are open. Consequently, moving in and out of the market is easy for investors. 

  • Convenience and Better Risk Management 

Exchange traded funds can be invested in online just after you open a Demat account with a broker. This makes them convenient and versatile investment options.  

Furthermore, ETFs are managed by experienced fund managers so this makes them a draw for investors who need help with their investments. 

ETFs - Right Reasons to Invest

ETFs give investors a lot to smile about, especially those who are actively seeking portfolio diversification, transparency, and flexibility. Blending ETFs with a bag of other diverse instruments makes your portfolio management truly simple and effective when it comes to making prospective returns. 

Disclaimer:Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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