ETFs (Exchange Traded Funds) provide an alternative to trading individual stocks, currencies (via the FOREX market) or commodities. ETFs are essentially a cluster/portfolio of financial assets, which you can purchase a portion of in one go. Recently, we did an article about why Amazon (NASDAQ: AMZN) is a good investment. However, trading stocks like Amazon does have its drawbacks, and certain ETFs, like Financial Select Sector SPDR (NYSEARCA: XLF) are better suited to some investors. The Financial Select Sector SPDR ETF is made up of companies from firms that operate in the financial services sector, insurance sector, commercial banking sector & much more.
1) ETF diversification Hedges Your Position, Lowering Your Risk Exposure
As ETFs tend to contain a mixture of assets, they are well-hedged against risk. Purchasing a share in an ETF, for example Financial Select Sector SPDR, is much easier than going off, and buying shares in a range of different stocks etc. However, some investors may prefer to have full control of their investments, and want to build a portfolio that is bespoke to them. Some ETFs are specific to a certain industry e.g. Financial Select Sector SPDR is exclusively made up of financial stocks. Other ETFs are much more diversified, and active in a range of industries. Regardless of the ETF, stocks will always be riskier (than any ETF), as it is much more likely that a particular stock will lose all of its value than a cluster of assets will.
2) An ETF is highly liquid
ETFs tend to be highly liquid. This means that you can easily buy or sell shares in a ETF, as there is a constant stream of supply & demand for them. This is especially true for large ETFs. The Financial Select Sector SPDR has a AUM (assets under management) of around $16,000 million with around 713 million shares issued. This particular ETF has been given a A+ rating for liquidity by ETFdb.com. It is true that many stocks also express high levels of liquidity.
3) ETFs are easy & relatively cheap to purchase
A share in the ETF Financial Select Sector SPDR is currently valued at $22.27. A share in Amazon closed at $586.14 yesterday. Therefore, if a beginner investor just wants to get involved with trading with only as little cash commitment as possible, trading certain ETFs may be better. Certain stocks are also affordable, so they should not be ruled out.
4) ETFs offer transparency
You can view the performance of any ETF in real time. Furthermore, most ETFs disclose all their positions/holdings online. The data is updated daily, so you can see find an ETF which meets your needs. This is in stark contrast to active funds, where you can only view their holdings monthly or quarterly.
ETFs do have some key advantages, but many of their advantages only apply to other funds e.g. some stocks share most of their advantages. Despite this, ETFs may be preferred by investors over conventional stocks due to their cost-effectiveness & diversity.