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Steven Ircha Jr. is a student at the Bronxville School in Bronxville NY.
  • American Investors Embrace Exchange Traded Funds  0 comments
    Nov 30, 2012 3:33 PM

    ETFs are innovative forms of investment that have only been around since 1989. Over the years, they have gained much more popularity as investors realize how convenient and tax efficient that can be. Investors as successful and well known as Jim Rogers do most of their investment in these funds. They are also very popular with day traders.

    What Are ETF's?

    The acronym stands for exchange traded funds. They are essentially investment funds that trade shares of themselves just as if they were stocks. The majority of assets in these ETF's track stock indexes like the S&P 500. Their distinction from index-tracking mutual funds is in their cost. Many ETF's have much lower total fees than stock index mutual funds. Many don't sell underlying securities that often, a benefit if you do not want yearly capital gains distributions.

    The Benefits of ETFs as Investments

    ETFs are advantageous when you compare them to almost any form of investment. Any relatively experienced investor knows how hard it is to beat the market with any single stock pick. The widespread nature of the underlying investments in ETFs allows shareholders to match the market's general growth instead. In addition to this benefit, investors in ETFs can avoid all the transaction fees that it would cost them to try this diversification scheme on their own with multiple stock purchases.

    ETFs are also advantageous in comparison to mutual funds and various index funds. ETFs do not have as high a turnover rate as mutual funds and tax gain distributions are much less common. Many average investors prefer ETFs to index mutual funds because the former do not have investment minimums.

    Drawbacks to ETF Investment

    As advantageous as these investments are, they are not without risks. Just like anything traded on the stock market, there is always a potential downside. If the underlying securities go down in price, the value of your investment will decrease. Furthermore, many new versions have come to play that invest in more volatile assets such as silver, gold, oil, gas. Some even attempt to magnify the returns of the underlying assets by 2 or 3 times. This is very risky when the market works against you.

    Investing in ETFs continues to grow in popularity alongside the concerns about their risks. The advantages are undeniable while the risks are unlikely to turn away the growing tide of interest in these financial instruments.

    I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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