Exchange-Traded Funds

For those of you who have worked with me, you likely already know that I am a fan of Exchange-Traded Funds, or ETFs for developing appropriately diversified portfolios.
Why ETFs? There are several reasons, but the ones I find most compelling are:

• Low cost
• Ease of Use
• Simplicity

Taking these factors one-by-one, first I’ll address the Low Cost factor. Since most ETFs require no management since they’re simply tied to an index, the expense ratio is incredibly small. For example, the average S&P 500 index mutual fund carries an expense ratio of 0.577%, while the average S&P 500 ETF has an expense ratio of roughly one-sixth the size, at 0.092%. Over the long term (which all of our equity investments should be) this differential can make a substantial difference in the results of your investments.

I work very hard to make sure that your investment portfolio is as cost-effective as possible – and using ETFs is, at this point in time, the best option I can find that strikes the balance between low cost and effective diversification.

Secondly, I choose ETFs due to their Ease of Use. What I mean by this is that ETFs, specifically index ETFs, provide the investor with immediate access to broad portions of the stock market with ease. When developing a portfolio of appropriate diversification, there is no doubt that you are covering the various facets of the market when you choose an indexed ETF for that market segment.

Lastly, the Simplicity of ETFs is readily apparent – when you realize that you can purchase an ETF from any brokerage account, with only the (usually small) transaction fee, you notice that there’s a small delay as your transaction settles in the account, unlike traditional mutual funds, which make take a day or two to complete the transaction.

Combining the simplicity, ease of use, and low cost of ETFs makes this choice a “triple threat” when constructing an investment portfolio.