When it comes to investing, do you like the freedom to select the specific investment instrument for your portfolio and decide when to buy and sell that instrument? To inform your decisions, maybe you enjoy searching financial statement filings for performance results, reading the company’s website for its business objectives, and watching expert commentary during the finance and economics segment on your favorite news channel.
Or does doing all the researching and screening of investments seem like more work than you have time for? Maybe you prefer to give up some control to portfolio managers and let them use the expertise they acquired to do all the legwork, leaving you with only the choice of which sector or investment objective appeal to you most.
But what if you didn’t have to settle? You could have the ability to buy and sell investments based on a specific objective without having to determine all the investment instruments that meet that objective. If this sounds like you, investing in exchange traded funds or ETFs might be the right investment approach for you.
While stocks and mutual funds have been the principle means of investing for a long time, the increasing variation in investment profiles has created the need for more flexible investment instruments. With publicly traded companies numbering in the hundreds of thousands globally, do you know which stock is worthy of your investment? Besides, are you really making the most of your investment dollars by investing in one company at a time?
When mutual funds were first introduced, they were a great invitation for investors who didn’t have the expertise or interest in developing investment strategies and screening stocks themselves. Mutual funds also significantly reduced analysis paralysis by allowing investors to pool their cash to invest in a professionally managed basket of investment instruments such as stocks or bonds that meet certain investment objectives. The approach is efficient and economical. Investors could invest in several instruments with one investment. No matter what strategy or industry you’re interested in, there is a mutual fund for that.
However, making the transition from stocks to mutual funds resulted in less investment control, greater expenses to investors via administration fees, purchases limited to the end of the trade day, and reduced transparency until the publication of fund values after market close.
These disadvantages might seem like a small price to pay for the valuable expertise the portfolio manager provides and the time you’ll save not having to undertake the research and analysis of the investments yourself. But ETFs allow you to regain the tradability and transparency of stocks without the greater expense of mutual funds all while continuing to provide the analysis and research of the portfolio management experts.
While ETFs don’t offer the same level of investment variety that is available with stocks and mutual funds, they provide enough selection, cost savings, transparency, tradability, and expert input to allow you to make the most of your investments. Investing in any combination of mutual funds, ETFs, stocks, and bonds will give you the variety and diversification every investment portfolio needs.