Exchange-Traded Funds or ETFs have taken up the world market by storm. More people are investing in ETFs with time. The reason is the added advantages that ETFs hold over traditional mutual funds. ETFs are mutual funds with a few more benefits attached.
Active and passive investors around the world are considering investing in ETFs to increase their profitability and improve their financial status. If you are looking for a good investment, ETFs should be among the list of your considerations. They can be easily bought from ETF services providers. These service providers may offer you guidance about where and when to invest.
But before you jump into the ETF bandwagon, here are a few things that you should factor in when investing in ETFs.
1. Underlying Index
ETFs, like every other investment, have certain underlying indexes or assets. Therefore, when you plan to invest in ETFs look for the market where you want to invest. You can invest in ETFs as a whole, or to a certain theme or a part of it. Investing in multiple themes and indexes can provide you with an opportunity for diversified options. In case, one ETF loses the price, you do not lose everything.
2. Assets Under Management
The asset under management (AUM) is calculated by multiplying the outstanding shares by the price per share. The prices of ETF assets fluctuate in the market, as the underlying security changes and when new shares are created or undergo redemption. The prices of ETFs may face a downfall or a discount when a difference is created between their market capitalization and Net Asset Value (NAV). When AUM is large, it means that the ETF will have more liquidity, hence more profitability.
3. Commissions And Other Expenses
When you buy exchange-traded funds from a company, they charge you with a certain expense ratio, called administrative expenses. These expenses help companies pay for themselves. If your ETF provider charges you with a 0.25% expense ratio, it means you will have to pay $25 with every $10,000 investment. If the expense ratio is high, the ETFs will become expensive for you. Look for brokers that charge lower expense ratios.
Secondly, when ETFs are exchanged, bought, or sold, there are certain transaction fees. This commission can also reduce your profits. Therefore, look for online brokers, as they work commission-free.
The exchange-traded funds are bought and sold throughout the day, unlike mutual funds that can be bought or sold only by the end of the day. Therefore, ETFs can have high liquidity. Low liquidity of funds can greatly reduce their bid and ask prices. Look for ETFs that have high liquidity, to earn maximum profit and increase their bid and ask spread.
Exchange-Traded Funds are a great investment opportunity nowadays. Before you invest in ETFs, look for service providers that charge low administrative expenses and work commission-free. Otherwise, your profit will reduce with expenses. You also want to make sure you keep a diversified portfolio with ETFs having high liquidity.