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Six Benefits of ETFs

Author: David J. Kosmider (info)
Website: http://eidoan.com/
Posted: February 6th, 2007 at 11:17 pm EST
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Exchange traded funds offer a variety of benefits for both traders and investors. Several of them will be discussed here.

1. Trade Like Stock - Unlike mutual funds or hedge funds which can only be entered or exited at specific times, ETFs trade just like stocks. They can even be day traded just like stocks.

2. Diversification - One of the main benefits of trading ETFs is diversification. ETFs are (with the exception of the commodity or currency ETFs) created to track a group of stocks. This shields you from the up and down swings of single stocks. You can trade an entire index at one time or just certain sectors.

3. Liquidity - There are many funds that are highly liquid. The QQQQ fund has an average daily trade volume of over 100 million shares and almost 40 other funds have an average daily volume of more than 1 million shares. Liquidity is important to get in or out of a position quickly. There are a lot of other buyers and sellers to facilitate your trades as opposed to relying on market makers as with stocks and options that have lower volume. Liquidity is definitely a benefit. If you are trading options on the funds, many of these also have highly liquid options.

4. Low Bid/Ask - As a result of high liquidity, many ETFs have low bid/ask spreads. A high bid/ask spread can cut into your trading profits. Most of the highly liquid ETFs have a bid/ask spread of only a few cents during the trading day.

5. Variety - Whichever sector of the market interests you, you can probably find and ETF for it. There are major index funds such as the QQQQ and SPY as well as sector funds such as XLV (Health Care), international funds such as EWW (Latin America),

6. Low Fees - ETFs have much lower maintenance fees than mutual funds or hedge funds. This means that more of your money stays in the investment rather than going to the firm that is maintaining it.

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