Percentage in Point

Posted: 21 Aug 2010 12:30 AM PDT

As the corporate world is moving at faster pace, exchange traded funds are gaining a lot of popularity among the investors compared to traditional funds. They are index based investment designed to imitate the index and give in the same return on the investment of the index. They are like equity which is easily traded on the stock market giving opportunity to purchase single/several shares, representing various equities.

Let's look at benefits and disadvantages of exchange traded funds.

Benefits of exchange traded funds

Economical: one of the major benefit of ETF’s is that it's less costly which means that everyone can afford to buy them and can easily maintain them. Commission charged on them is very low as only single transaction can be performed on per trade. Fees related with ETF’s are also comparatively lower than ordinary mutual funds.
Tax Friendly: capital gained on the ETF’s is lower than mutual funds because of the structure of actual trade. The main benefit is that the individual capital gains coming through ETF’s are not taxed until all the assets from the funds are sold, whereas, capital gains are directly taxed on mutual fund or index trade.
Easy to Manage: Unlike, other funds ETF’s don't require any aggressive management. They need slight adjustments as they are establish to follow versus outperform an index. Due to this, risk involved is relatively low and requires low management fees.
Easy to follow: list of assets in funds is published on daily basis by the creator of ETF making it easy to follow and easy to understand compared to mutual funds which are not published often and are hard to understand.

If there are benefits of ETF’s then there are several drawbacks associated with them aswell which are listed below:

Drawbacks of exchange traded funds

Brokerage Fees: Though they are very economical as per other investments but the brokerage fees paid every time an ETF-s is purchased or sold, it may wash out a minor budget. With limited budget, this fees can counteract the economical advantages.
Lack of uniformity: ETF’s requires a lot of research and analysis of the trends before investing. Few ETF’s are expensive. One should look for cheap ones, in terms of cost, ETF’s from wide range products available.
Powerful investment tool: ETF’s like leveraged or inverse type can be dominating tool. Tools which are not managed correctly may cause a lot of damage in terms of money. Due to this, anyone with lack of understanding of market as well as individual investment should take advice from financial advisor.