Adding ETF’s to your Portfolio

by | Nov 18, 2013 | Financial Services

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ETF’s or Exchange Traded Funds can provide many options and benefits to the investor. If you have avoided index mutual funds and enjoy the benefits of individual stocks but want something new to add diversification to your portfolio, ETF’s provide a happy medium between the two. There are many ETF trading strategies you can use to keep things interesting.

ETF Trading Strategies
Strategically, ETF’s allow you to trade in the broad market indexes for a low-cost diversified index portfolio.  Just a few ETF’s will provide you with a portfolio that suddenly includes the equity market working using simple buy and hold ETF trading strategies that will follow the market’s benchmarks.

Long Term Portfolios
ETF’s also allow you to manage your holdings actively as opposed to having to to use passive management. This can be appealing to those whose core portfolio is set who ca then look for specialized ETF’s that will add a number of opportunities such as small caps or emerging market. There really isn’t any index that is not tracked with ETF’s. You can use long-term tactics while reaping the benefits of active ETF trading strategies.

Active Management of Long Term Portfolios
ETF’s allow long term investors to enter and exit a market or market niche as ETF’s can be bought and sold as the market dictates by its movement. There are no penalties unlike mutual funds. It is important to be aware although there are no penalties you do pay a commission when trading ETF’s. You just have to keep track of the commission and ensure it remains nominal in comparison to your potential gains. You can buy long and sell short with ETF’s using the same strategies for stocks or bonds with the added benefit of trading a market as opposed to individual elements.

Tax Advantages
Adding to the appeal of ETF’s is the tax advantage they hold over options such as mutual funds. Unlike mutual funds in which you can end up paying as much as 2 percent in returns for higher income earners, ETF’s require you pay capital gains taxes only if you earn capital gains. You pay taxes on mutual funds based on capital gains earned by the fund itself even if you yourself have not sold anything or if that gain occurred before or after your purchase. This makes ETF’s one of the most cost efficient choices providing tax efficient options as well as flexibility.

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