Posted on Jan 29, 2015 in Stock Success

In this Rich Dad Education investing article we will look at some of the advantages ETFs offer investors.  While there are numerous advantages and exciting aspects to investing in ETFs please be sure to read our follow up article on the pitfalls of ETF investing in order to gain a more complete understanding about the world of ETF investing.  While many get excited about the many advantages of ETFs, ultimately it will be up to you to decide if ETFs are right for your investment objectives.

Advantages of ETFs

Diversification. Many do-it-yourself investors have a limited understanding of how to build a diversified portfolio. They only buy a handful of stocks in attempt to diversify or ignore the concept of diversification entirely. With the single purchase of an ETF, an investor can immediately gain a level of diversification within their portfolio. With the purchase of ten different ETFs spread across different markets, sectors, and commodities, and investor can gain access to literally hundreds of stocks spread across the investment areas they choose, balanced with a mix of commodities such as gold.

Time Commitment. One of the main issues that the do-it-yourself investor faces is time. It can be very time consuming to investigate hundreds of companies in order to find the right balance of quality companies that meet an investor’s investing criteria. Quite frankly, this is a barrier to entry for many new investors looking to manage their own portfolio. While an amount of research still needs to be done if one wishes to invest in ETFs, a great deal of this research is done on a macro level looking at broad market trends and economic fundamental factors. Evaluating large macro factors is simply less of a time commitment than evaluating hundreds of individual companies.

Options and Shorting. While not every investor will take advantage of selling options or shorting an ETF, having this ability is quite an advantage for the astute investor. With the proper training, an investor can make money in any market, up, down, or stagnant. Having the ability to short an ETF or sell options can give an investor important tools to conquer the market.

Trading During Market Hours. It should be emphasized again that ETFs can be traded just like shares of stock. An investor enjoys instant order execution when they place an order to buy or sell an ETF. Aside from the ease and convenience this offers an investor, it offers a sizeable advantage over the traditional mutual fund which does not enjoy this luxury.

Low Fees. Speaking of mutual funds, has the world gotten the memo yet that mutual funds quite often fail to outperform the major indexes? Have people gotten tired of handing over their money to mutual fund managers and deal with the management fees associated with mutual funds? While ETFs have trading commissions similar to stocks, they are not burdened with the high management fees that are often associated with mutual funds.

Dividend Enjoyment. Dividends play a big part in the decisions of certain investors. While some may ignore dividends by simply focusing on overall returns, there are many investors who enjoy the passive income that dividend stocks produce. Many ETFs are comprised of dividend paying stocks and there are even certain ETFs that focus exclusively on companies that pay dividends.

Less Volatility Compared to Individual Stocks. While volatility can exist in any market, with a diversified portfolio of ETFs, one will likely experience far less volatility than if one simply held onto a handful of individual stocks.

Ability to Invest in Markets that Otherwise would be Unavailable.  I want the ability to invest in Brazil, or Chile, or China, or Africa, or move my money to bonds with relative ease. ETFs give me this luxury and flexibility to invest in numerous markets from around the world.

These are just a few of the advantages of investing in ETFs. In the next article we will look at some of the disadvantages and pitfalls of ETF investing.

by Mark Justice

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