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Exchange Traded Funds (ETFs) were first introduced to markets in 1993. From there they remain one of the mainstream instruments for profiting from market. With time various financial firms introduced different kinds of ETFs which track different underlying products with various levels of risks and returns.
Trading exchange traded funds holds many advantages over trading stocks, bonds and index funds. Most of these advantages derived from the fact that ETFs are less actively managed and have low tracking error.
1. Exchange traded funds are just traded like stocks. That means one can day trade them, swing trader them, invest in them, short them and can trade them on margin.
2. ETFs are liquid trading instruments. Unlike bonds, they can be intra-day traded for price differences and can be bought and sold at any time during market hours. This makes them flexible to handle.
3. ETFs are almost free from scamps so far. This is because of the fact that the firms have to disclose their holdings on a daily basis. Traders can accurately know the value of the shares they are holding.
4. Exchange traded funds ensures portfolio diversity. They can be incorporated into any type of trading portfolio and can be used to reduce risks or to maximize returns.
5. ETFs are less expensive than index funds. Index funds usually have an expensive ratio close to 1 where ETFs have that close to 0.2. And many studies have shown that they can offer as much (or even more) return as index funds.
6. Variety of funds available to choose from. There are index specific, sector based, international, regional-specific, industry-specific, market-specific and currency specific ETFs available to fulfill different trader demands.
7. They are multi-purpose instruments. ETF can be used for minimizing trading risk, for steady income, for quick portfolio growth, for hedging the risk, for just portfolio diversification, and for saving time and money of active investment management.
8. ETFs also hold tax benefits as they are more tax efficient than index funds and stocks.
But trading exchange traded funds do not include only benefits there is also another side. Like stocks, they involve risk and for profiting the trader should have good market knowledge. They are poor investment instruments for dollar cost average and the trading of them involve brokerage fees and other account requirements which can vary with broker and type of account.
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