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Uncovered: Four advantages to investing in exchange traded funds

by , 12 June 2013

You may have heard about exchange traded funds (ETFs), but do you know what they are or why you should consider investing in them? Read on to discover the four main advantages of investing in ETFs…

ETFs provide you with a great alternative to shares when investing in the stock market.

But before we go any further, let’s find out exactly what an ETF is, as explained by The South African Investor

What is an ETF?

An ETF is an investment fund that trades on the stock exchange like an ordinary share. But, unlike a share, an ETF holds assets such as shares, commodities and currencies. For example, there are ETFs that passively track benchmark indices, such as the JSE Top 40 Index.

ETFs reflect the performance of the market or underlying asset it tracks.

Four advantages of investing in ETFs

#1: They are cost-effective:
Investing in ETFs helps you create your own well-diversified portfolio without paying a fortune.

For example, if you want to invest in the likes of Sasol, SAB-Miller and BHP-Billiton, but you don’t have the capital to do so, you could invest in the Satrix 40 ETF. This ETF comprises of the top 40 companies on the JSE across all sectors, including the resource, industrial, retail and financial sectors.

The only purchase cost you pay is the broker’s commission fee.

#2: They are transparent:
Unlike managed funds, such as a unit trust, when you buy an ETF you know exactly what companies you’re investing in, including the percentage exposure you have to each.

#3: They are easy to trade:
Unlike unit trusts, you can buy and sell ETFs through the day. This means you can take advantage of intra-day highs and lows. They’re easy to buy and sell. You can do so through your broker in the same way you buy and sell shares.

#4: They are flexible:
Because you can short (sell) or go long (buy) with ETFs, you’re able to take advantage of bullish and bearish moves in the underlying shares or assets.

So there you have it, four advantages to investing in ETFs.

Uncovered: Four advantages to investing in exchange traded funds
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