Understanding ETFs and Why You Need them in Your Portfolio

If you are thinking about ways to build your investment account or retirement money, there are many ways to do it. You could go with stocks, bonds, money markets, and more. Every type of investment comes with a risk but some will have more of a risk than others. While you do want to consider the risks, you also want to consider the amount of time you have until you need to begin to draw on that money. One option you do not want to overlook is exchange-traded funds (ETFs).

Advantages of Investing in ETFs

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Similar to mutual funds, ETFs often contain many different types of investments. This enables them to remain more stable than a handful of stocks or funds that may be contained in a mutual fund. ETFs are based on stock indexes and often reflect the same gains and losses of that index.

Some ETFs may contain all of the stock within a certain index. This will provide you with a larger diversification and a more stable rate of return over the long term. Not every ETF will give you the same level of diversification. Some of them only focus on a particular sector and only offer stocks within that sector. Since whole sectors may suffer losses, it may not help you get the stability you want.

You can increase the diversification even more by buying shares from other overseas countries. One drawback, however, is that if a fund has overseas funds in them, they will need to have staff there – which will lead to higher fees. Adding overseas funds lets the economies of other countries strengthen and reinforce your investment.

Exchange-traded funds are either managed or passive. When you have a managed ETF, the fees are going to be higher because the company will have to hire staff to watch the various stock and market funds. In a passive fund, the fees are usually lower because they have a smaller staff.

Lower Cost

The number of ETFs continues to rise and one reason for their growing popularity is the lower cost, which means you get to keep more of the profit. Mutual funds are required to be managed, which means less profit for your money.

You can expect the range of costs for ETFs to be generally lower than mutual funds but it is not always true. This means you keep more of the profit. A good price for a managed portfolio will range from 0.5% to 0.75%. Generally, if the cost is more than 1.5%, it is considered high. Some ETFs can cost almost 3.0% – which is very high. The costs for a passive portfolio will often run in the 0.2% range.

Real Estate Investment Trust ETFs (REIT ETFs)

When you want an even greater way to diversify in a way that will most likely stabilize your investments and still provide you with an income, it makes a lot of sense to add REIT ETFs in your portfolio. The advantage is that real estate often does not move in the same way as the stock market. REITs are required by Congress to pay out at least 90% of their profits that are taxable as dividends. This can give you good cash flow and help protect your investment.

ETFs can be a solid way to increase stability to your investment or retirement account. Current studies indicate that ETFs are expected to increase as more brokers and investors understand their value.

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