Exchange Traded Funds: Why Are ETFs Cost Effective?

Exchange Traded Funds: Why Are ETFs Cost Effective?

ETFs (Exchange Traded Funds) are a popular and cost-effective way for investors to invest in segments like equity, commodity, and fixed income. Their unique structure and their flexibility to be traded like stocks make them ideal for all types of investors, whether retail or institutional, long-term or short-term.

How come ETFs are so cheap“! This question is most frequently asked among all the investors. Exchange Traded Funds are a sight for sore eyes, especially for investors who are finding it difficult to manage their expenses even while investing in the financial markets. It is important to note that ETFs have made their presence felt in the stock market for making the chances of return on investment more attractive.

Many new investors consider ETFs to be more cost-effective than mutual funds. The difference between an ETF and a mutual fund is that the latter comes with a mixture of investments that can include stocks, bonds, and cash. On the other hand, most ETFs follow a specific strategy with solid and liquid assets and tend to be more cost-effective. These instruments can be traded easily and removing them from your portfolio is quite simple. You also wouldn’t need to pay any transaction fees or maintenance charges when you opt for this type of investment.  

You can either be a person who does manual trading or use an automated ETF app to make trades suited for you. What’s crucial is finding the best app for ETFs that offers all the tools you need. In StockApps, they review the best ETF apps which are well worth taking a look at to help guide the way into your future investing journey.

 The structure of an Exchange Traded Fund is indeed cost-efficient. Since the ETF is listed on a stock exchange, the costs of distribution are certainly lower and the reach is wider. Furthermore, since a mutual fund can be redeemed at any time, whereas an ETF cannot, the costs of collection, disbursal and processing are much lower for an ETF.

ETFs are gaining more and more adherents in the investment community. And it is not surprising, since this unique investment vehicle allows investors to track – nearly perfectly – the movements of a portfolio’s benchmark while incurring only the costs of transactions in the underlying securities. The intraday liquidity and transparency of ETFs – their ability to be traded throughout market hours at the fund’s net asset value also allow them to provide a better-than-cash-alternative for short-term investors.

ETFs can be efficiently used by investors to buy, sell or trade stocks based on the index. This is useful for both mutual fund and stock investors as it allows easy asset allocation, hedging opportunity, cost-effective equitization of cash at low transaction costs. It also helps in providing efficient arbitrage between the cash market and the futures market.

With Exchange Traded Funds, you can achieve diversification in sectors, values, or geographies at a low cost. All this comes with the benefits of daily liquidity, transparency, tax efficiency, and no investor limitations. Simply put, ETFs are cheap to trade, cheap to invest in, and cheap to hold. Taking it a step further, ETFs eliminate the need for most active management techniques too.

John Norwood
John Norwood is best known as a technology journalist, currently at Ziddu where he focuses on tech startups, companies, and products.