The advantages of ETFs:
Lower costs
Expenses can have a significant impact on returns for investors. ETFs, in general, have significantly lower annual expense ratios than other investment products. ETFs are less likely to experience high management fees because they are index-based, not "actively" managed. And, since they trade on an exchange, ETFs are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions. Of course, an investor selling ETF shares may realize capital gains or losses, as with common stocks. Purchases or sales of exchange traded funds are subject to brokerage commissions.
Transparency
ETFs are designed to generally replicate the holdings and correspond to the performance and yield of their underlying index.
Buying and selling flexibility
Because they are exchange traded, ETFs can be:
. Bought and sold at intraday market prices
. Purchased on margin
. Sold short, even on a downtick (unlike common stocks)
. Traded using stop orders and limit orders, which allow investors to specify the price points at which they are willing to trade
All day tracking and trading
ETFs are priced and traded throughout the day, and are not restricted to once-a-day trading at the end of the day. And because the pricing of ETFs is continuous during trading hours, investors will always be able to obtain up-to-the-minute share prices from their broker or financial adviser.
Diversification
Because each ETF is comprised of a basket of securities, it inherently provides diversification across an entire index. Additionally, the expanding universe of ETFs offers exposure to a diverse variety of markets, including:
. Broad-based equity indexes (such as total market, large-cap growth, and small-cap value)
. Broad-based international and country-specific equity indexes (such as Europe, EAFE, and Japan)
. Industry sector-specific equity indexes (such as healthcare, energy, and real estate)
. U.S. bond indexes (such as long-term Treasury bonds and corporate bonds)
Dividend opportunities
Dividends paid by companies and interest paid on bonds held in an ETF are distributed to ETF holders, less expenses, on a pro rata basis. Of course, not all companies will pay dividends. Based on past performance, few, if any, distributions can be expected from certain ETFs. There may also be opportunities for reinvestment of distributions.
