Market volatility often causes investors to loosen the tires on their portfolios, but this can be a challenge for U.S. investors in exchange-traded funds (ETFs) to update positions or act on new ideas. It often means looking to the.
Since the pandemic, the ETF market has nearly doubled in size, and as of the end of the first quarter, (ETFs) accounted for $7.1 trillion (13% of the U.S. stock market and 2.8% of the U.S. bond market), up from $3.5 trillion. did. in 2019, according to BlackRock.
Todd Thorne, ETF strategist at Strategas Asset Management, recently appeared on Yahoo Finance’s “Stock in Translation” podcast and highlighted some of the pros and cons of ETFs for investors.
The main advantage of ETFs is cost. The fees charged to investors have fallen significantly as major brokers compete for zero commissions.
“You can buy an S&P 500 fund for two or three basis points. That’s not a big deal,” Song said.
Simply purchasing one share of each component of the S&P 500 would cost approximately $105,000. Yahoo Finance calculates that replicating the entire index, depending on each stock’s weight, would cost at least $15.5 million, not including brokerage fees. In contrast, the ETF’s annual fee of 3 basis points (0.03%) means investors pay 30 cents for every $1,000 invested.
ETFs also tap into a wide range of markets and strategies, which is essential for diversification.
Song emphasized that ETFs provide investors with “access to virtually every market in the world.”
In addition to geographic and asset class diversification, ETFs have evolved to mimic certain hedge fund strategies. For example, so-called smart beta ETFs use predetermined rules to select investments in the fund.
Son also emphasized that transparency is a key benefit of ETFs, as they report their holdings on a daily basis.
“You can see the stocks you own every day. You can see what ingredients are included in your investment,” said Song.
ETFs are similar to mutual funds, but the main difference is their intraday liquidity. ETFs can be traded throughout the day, while mutual funds can only be bought and sold at the closing price.
“You can trade all day long if you want to,” Song said. “Or if I’m a big investor, I can move a lot of money into these funds.”
Many ETFs also offer significant tax benefits, which Son described as his “secret sauce.”
And during times of market stress and volatility, ETFs act as “shock absorbers.” If investors are concerned about a decline in stock prices, “they can buy peer ETFs to diversify and reduce risk,” Song explained.
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“ETFs have great value in a volatile environment. They’re not deteriorating any market structure. They’re helping smooth things out,” Thorne said.
In Yahoo Finance’s podcast, “Stocks in Translation,” Yahoo Finance Editor Jared Blikre cuts through the market clutter, loud numbers, and hyperbole to provide important conversations and insights from across the investment landscape to help you make the right decisions. Provides the essential context needed to make decisions. your portfolio. Find more episodes on our video hub. Listen on your favorite streaming service, or listen or subscribe on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.
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