What are the benefits of ETFs?

ETFs offer several potential benefits, including low costs, liquidity, diversification and more.

 

Low costs

ETFs generally have lower expense ratios than mutual funds, and index-based ETFs generally cost less than actively managed funds and ETFs. Lower costs mean more of a fund's returns go to the investor. However, ETFs have trading costs that mutual funds don't, so investors should always weigh the full costs of investing.

 

Flexibility

ETFs are traded on stock exchanges, so they can be bought and sold any time the exchange is open. Since many ETFs track indexes in specific market segments, they offer a flexible way to build a new portfolio or restructure an existing one following a change in circumstances or goals.

 

Diversification

An ETF that tracks an index might contain hundreds or thousands of securities—more than many actively managed funds and far more than a typical portfolio of individual securities. Broad diversification can help offset the risks associated with any one security or market segment.

 

Transparency

Index-based ETFs hold the same securities, or a representative sample, as their benchmark indexes, so you'll always know what you're investing in.

 

Low manager risk

Index-based ETFs virtually eliminate the exposure to manager risk. That's because they seek to track, not outperform, a market index. Active fund performance is less predictable.