Most people think of standard equity ETFs when they hear Exchange Traded Funds. These funds have some of the largest Assets under Management, and have been a staple for Advisors and investors to plow money efficiently into diversified assets. What the average investor might not know, however, is there are ETFs for almost any investment idea.
For example, buying a bond mutual fund or even individual bonds has always been expensive and somewhat risky. Now there are bond ETFs for virtually every corner of the Fixed Income Market. The transaction fees are minimal and most funds are run very efficiently. This keeps the overall cost low. Here is a quick look at Treasury ETFs that are the top performers over the past 6 months:
Just one note on Fixed Income ETFs. Pay close attention to the expense ratio.
There was a time not so long ago when investors who wanted exposure to the emerging markets would open an account at a well regarded mutual fund. They would pay 5% upfront for the privilege of investing with the fund, and then pay an exorbitant 1.5% – 2.5% of assets per year for expenses. ETFs have changed that. Now, you can buy an international ETF, pay a small transaction fee, and then an expense ratio in the range of .5%. Additionally, you can trade in and out of these funds quickly – enabling you to nimbly dodge in and out of markets.
For example, TUR is a fund that invests in Turkish equities. Obviously, it has struggled over the past six months, as the Turkish economy has unwound. When you think it has hit rock bottom, you can quickly get an investment in, and potentially ride the wave! This would not have been easy to do before ETFs existed.
Do you think Oil is headed for a rise? Maybe you think Gold has legs…. Now with ETFs you can dive into these positions simply and easily.
In summary, ETFs open investor’s opportunities by enabling positions in non-vanilla investments. In the past, it may have been simply too cumbersome to take these positions. Now it is as easy as buying a stock.