Most people are just learning about ETF trading. Many have only heard bits and pieces about the Exchange-Traded Funds market and how it works. This is an incredibly complex market that a person will want to learn and get comfortable with before beginning trading in earnest. This is a brief overview of the benefits of ETF trading that may encourage a person to look into the market more closely.
There are many benefits to ETF trading but a person needs to know that the “history” referred to in ETF is relative. The major players in ETF trading are large financial firms that have a strong history and background in the stock market. ETF itself began being actively-managed in 2020. When one looks for a “history” of success with ETF they will want to look to the firms that have a history of success on Wall Street.
The next important item to know is that this industry is growing like crazy. In 2020 there were 628 ETFs with $562 billion, in August of 2021 there were 858 ETFs with $674 billion. With the growth has come many different types of ETFs that range from minimally risky to very risky.
ETFs are a lot like stocks in terms of ETF trading and have some distinct advantages. They are normally low cost and not actively-managed. There is no buying and selling of securities to accommodate shareholders. There are lower marketing, distribution and accounting expenses. And, most don’t have 12b-1 fees.
There is a tremendous amount of buying and selling flexibility. ETFs can be bought and sold at any time during the trading day. A person can purchase shares on margin and sell short which allows hedging strategies to be used. Most of the benefits of stock trading are included in ETF trading. A person can use stop order, limit orders, use stop-loss orders, and buy on margin options (puts, calls, etc).
Just as with mutual funds, ETFs have tax efficiency. There are low capital gains generated due to low turnover in portfolio securities. The trading gives market exposure and an investor has an economical way to balance their portfolio due to the diversity of trading options. One of the greatest advantages of ETF trading is the transparency. Daily transactions are posted on the ETF brokers website each day that gives a detailed analysis of the net asset value and other details regarding trading for the previous day.
Most ETFs are structured as open-end management investment companies. They must get an exemption from the SEC for form the company and are structured the same as mutual and money market funds. This gives the ETF flexibility when constructing their portfolio. The ETF can use futures and options to achieve investment objectives and participate in lending programs. The SEC has a proposal to make ETFs open-end management investment companies which will alleviate the need to get an exemption.
If a person is considering ETF trading, it is very important to talk to a professional who has expertise in ETFs. This person will be able to discuss the many complex and intricate details involved in trading. They will also be able to answer any questions that one may have about how to make knowledgeable decisions in the ETF market.
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