Indexes and ETFs
How Indexes and ETFs Simplify the Investment Process? Warren Buffett was once asked what was the best investment strategy for the average investor. His response was to invest in a “low cost index fund” and not worry about it. So what is index investing and what is it so advantageous? Here, we will take a look at index and ETF investing and what it has to offer.
What is Index and ETF Investing?
An index represents a basket of assets or a single commodity to create a composite. An index can be represented as a fund. The equities version of index investing is known as an exchange traded fund or ETF. An ETF will consist of either a basket of assets or a single asset. Today, you can invest in index or ETFs that represent almost everything from the S&P 500 to Bitcoin and oil.
What are the Advantages of Index and ETF Investing?
There are a number of reasons why you will want to consider index or ETF investing. Here is a look at the five most compelling reasons to consider these types of investing for your portfolio.
1). Excellent Liquidity
Many indexes and ETFs have excellent liquidity. For instance, the SPDR S&P 500 ETF (SPY) is one of the most liquid indexes on the NYSE. It is extremely easy to trade in and out of the SPY with large amounts of money.
2). Removes Single Stock Risk
Many Indexes and ETFs represent a basket of stocks, commodities or other assets. This takes away the “single stock risk” that scares many investors. With Indexes and ETFs, you can lower portfolio volatility and smooth out returns.
3). Allows for Easy Diversification
Index and ETF investing can also allow for easy diversification. For instance, simply owning the SPDR S&P 500 ETF (SPY) allows you to hold a basket of 500 stocks in one trade. Holding just three to four indexes or ETFs in different asset classes (Stocks, commodities, bonds, and cryptocurrency) can allow for excellent diversification.
4). Low Fees
ETFs and Indexes can offer you amazing low fees. As an example, the annual management fee for the SPDR S&P 500 ETF (SPY) is just 0.0945% per year. As an example, if you hold $100,000 worth of SPY ETFs for 12 months, you would only pay $94.50. Compare that to many financial advisors who may charge you 1% to 2% fee to manage your portfolio.
5). Tax Advantages
Finally, ETFs and Indexes are extremely tax friendly compared to trading on your own. Imagine trying to rebalance a basket of assets on your own and dealing with the tax ramifications. ETFs and Indexes simplify the process.
Getting Started With Index and ETF Investing
If you are looking for a simple way to invest, then index and ETF investing is the optimal choice. Be sure to review the features and fees of an index fund or ETF before investing.