If you are looking to diversify your investments, hedge your risk, or gain exposure to a certain industry or market, then ETFs may be the perfect asset for your portfolio. Here are some more details on why so many investors love ETFs. ETF investing essentially provides the same diverse group of holdings with a single transaction. You can think of each ETF share as its own mini-portfolio—a basket of partial stock shares. This simplifies the purchasing process, so investors don’t have to place dozens of orders and decide what a fair price would be for each of those orders. ETFs can also be sold short or on margin, and prices are continuously updated during the trading day. In other words, ETFs trade just like equities on the stock market, despite how much more diversity they provide for investors. In the case of ETFs, on the other hand, capital gains are not realized until the assets are sold. That means an investor can effectively choose when to impose ETF taxes on themself. However, investors will still pay taxes on ETF dividends as they’re distributed. Also, be aware that sometimes options and futures are included in an ETF’s holdings. Derivatives aren’t usually included in passive index ETFs, but they are commonplace in leveraged and inverse ETFs. It’s always a good idea to check an ETF’s holdings before adding it to your portfolio, so you can fully understand the impact the ETF will have on your trading strategy and risk exposure.
