Exchange traded funds or ETFs are a widely popular investment tool. They are characterized by their low costs and trading flexibility. Kavan Choksi / カヴァン・ チョクシ also mentions that ETFs can help investors diversify with broad or targeted exposures. ETF basically is a basket of securities that can be purchased and sold in a single trade on a stock exchange. Today, a number of institutional and individual investors use ETFs in a plethora of ways in order to meet their investment goals.
Kavan Choksi / カヴァン・ チョクシ highlights some of the major benefits of investing in ETFs
Investing in ETFs is among the simplest ways to diversify a portfolio. Exchange traded funds, much like mutual funds, tend to hold dozens, if not hundreds, of different investments. Hence, they are naturally more diversified than investing in an individual stock or bond. A significant portion of the ETF landscape comprises of index ETFs, which seek to track the performance of benchmark indexes comprising of multiple individual securities. Investing in ETFs allows investors to spread their investment across multiple classes, geographies, and sectors. This lowers the risk of weak returns from an individual security hurting the overall portfolio performance. By improving portfolio diversification, ETFs offer the potential for better risk-adjusted returns.
With the growing popularity of the ETF industry, the number of market exposures available within ETFs has also increased. Today, investors can easily use ETFs to meet their investment objectives by accessing both broad and targeted exposures across:
- Asset classes: Equities, currency alternatives, fixed income, commodities
- Geographies: Global, regional, single country, emerging markets, developed markets
- Sectors, industries, styles: Equity exposures like large/mid/small cap, income exposures like high yield, bank loan, aggregate
- Investment themes: Multi-generational themes like sustainability, technological advances, urbanization
Kavan Choksi / カヴァン・ チョクシ points out that, as the majority of ETFs are managed passively, they generally have lower management fees and operating expenses in comparison to mutual funds. Transaction costs involved are usually low owing to the low turnover of most ETFs and the indexes they track. As fees and expenses associated with ETFs are low, investors get to keep more of their returns.
During periods of heightened market uncertainty and frequent price fluctuations, liquidity becomes a critical consideration for investors. They look for investment options that allow them to enter and exit positions smoothly, without excessive delays or high transaction costs. ETFs stand out in this regard because their liquidity is supported by a dual-market structure, which enhances flexibility and efficiency for market participants. As ETFs are traded continuously throughout the trading day, much like individual stocks, investors can respond promptly to changing market conditions. This intraday trading capability allows investors to adjust their portfolios in real time, take advantage of short-term opportunities, and manage risk more effectively during volatile periods.
ETFs also allow investors to benefit from primary market liquidity, which is derived from the liquidity of the underlying securities that make up the fund. In many cases, the combined liquidity of these underlying assets can exceed the trading volume of the ETF itself. This relationship strengthens overall liquidity and makes sure that ETF prices remain closely aligned with their net asset value.
