Exchange traded funds received their start from active day traders and swing traders looking for better ways to trade Wall Street's indices. Today, there are ETFs for everything, ranging from certain commodities and sectors to an entire country’s stock exchange. ETFs could easily become the future of retirement investing for a variety of reasons.
What We Already Know about Investing
Investing 101 tells us that sector investing is a proven and profitable way to invest. Rarely does just one stock rise in value in an entire sector; generally, companies of the same type rise and fall together. We also know that index funds have outpaced or equaled the majority of managed funds with lower fees and no sales loads. ETFs fulfill both requirements in giving investors access to a whole sector and allowing the same investors to buy and sell whole indices.
Lower Fees with ETFs
Take a look at your retirement portfolio and compare the fees of managed funds and mutual funds to any ETF, and you'll quickly find that your mutual fund holdings cost as much as 10 times more than the standard exchange traded fund. Most mutual fund investors are part-time or hands off investors who pile money into a 401k or IRA each month without reading the fine print of a statement, while ETF investors are generally more experienced and critical of fees. ETFs also have a considerable amount of competition between one another, as most ETF traders are independent and do not use firms that limit choices. The only way to beat out the competition in the ETF scene is to do it better or to do it cheaper, and considering that two ETFs in the same sector are largely the same, the only way for a fund to beat another is on price.
By the Numbers
The majority of ETFs have fees less than a quarter of a percentage point (.25%), while even the most inexpensive mutual funds fail to meet the same requirements. The rationale is simple; mutual funds have extensive back-end work regarding standard deposits and withdrawals, while the open ETFs are rapidly bought and sold electronically on the market. In addition, most ETFs are operated by firms that manage a variety of funds and have staff on board to manage the funds. Most ETFs make very few trades, even when considered to mutual funds, as reallocating investments isn't difficult when the initial amount always remains the same.