The Advantages Of ETF Trading: Basics
If you are a person who has just been introduced to ETF Trading (Exchange-Traded Funds), then this introduction may be helpful. ETF is very complex and there are many moving parts to trading so this is a broad brush stroke of some basic information and the advantages of ETF trading.
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 2008. 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.
Another factor in determining the popularity of ETF training are the numbers. There were 628 ETFs in 2008 with $562 billion. In August, 2009, there were 858 ETFs holding $674 billion. Part of the astounding growth of ETF trading has been due to the number of ETF trading markets that are available. Some of the trading is of minimal risk to a trader. Other trades are extremely high risk and require extensive knowledge of the movement of the market one is trading in.
There are numerous advantages to ETF trading. It has many of the benefits that stock provide. However, ETFs are usually very affordable when they are not actively-managed. Most ETFs do not have 12b-1 fees. There are lower accounting, distribution, and marketing costs. And, there is not forced purchase or sales of securities to pay shareholders.
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).
ETFs generate relatively low capital gains so have the same tax efficiency as that found in mutual funds. This is because of the low turnover in portfolio securities that ETFs have. A trader can balance their portfolio allocations more economically because of the market exposure and diversity of the trading. And, whether the ETF is actively-managed or indexed, there is transparency. Each day the ETF website posts the net asset value and other information that the trader will want to know for the day before. One is never left in the dark about trading or asset management.
In order to be structured an ETF must get an exemption from the SEC. Most ETFs are structured as open-end management investment companies the same as mutual and money market funds so have greater flexibility in constructing a portfolio. They can participate in lending programs and can use futures and options to achieve investment objectives. The SEC has proposed a category for ETFs that will make them open-end management investment companies. When the proposal is approved ETFs will no longer have to get an exemption.
When considering ETF trading it is important to talk to a professional who has knowledge about ETF trading and the intricacies of the market. There are many complex details that one should have a solid knowledge in before entering trading. A professional will be able to assist and advise an individual in the best strategy to be successful when they begin trading.
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