Exchange-traded funds, or ETFs, can be a good way to diversify your portfolio and can be cost-effective.
"ETFs are generally less costly and easier to access for investors," said Ben Johnson, Morningstar's director of global exchange-traded fund research. "They offer investors access to a whole host of investment strategies, from total market indexes to actively managed portfolios of stocks linked to the metaverse, with low fees, superior tax efficiency, and often much smaller investment minimums—typically as low as the price of a single share."
Here's what industry experts have to say about how to make ETFs sound investment values.
Try to consider limit orders
Johnson notes it’s important to know and respect what the "ET" in ETF stands for. "ETFs trade like stocks, and investors should practice good hygiene when it comes to trading them to avoid running up a big trading cost bill," he said.
Specifically, Johnson explained that investors should consider using limit orders when buying and selling ETFs.
"This will help to ensure that they get the price they ask for (if not better) and prevent them from transacting at a price they might not like," he said.
Benefit from tax efficiencies
ETFs are fully transparent, said Tom Lydon, vice chairman with VettaFi.
"They frequently update their holdings, so investors know exactly what they are getting themselves into," he said.
Also, Lydon explained that ETFs are more tax efficient than traditional open-end funds. Due to structural differences, said Lydon, ETFs do not incur a capital gains tax like how mutual funds would, but still come with a capital gains tax upon the sale of the ETF by an investor.
ETFs build on the ease of mutual funds
According to Lydon, ETFs may be seen as an improved version of their mutual fund cousins, providing the benefits of mutual funds and then some.
"Some of the key selling points of ETFs beyond traditional open-end funds may include things like lower expense ratios, flexible intraday trading, transparent nature and improved tax efficiency for taxable accounts," Lydon said.
Finally, unlike mutual funds that are bought and sold once per day after the market closes, ETFs trade all day long.
"If you are familiar with trading individual company stocks on a brokerage platform, then picking up an ETF should be a similar experience," continued Lydon.
Furthermore, he said more knowledgeable investors may also utilize various trade orders for executing ETF trades, including limit orders and stop-limit orders, along with short selling, to better manage their investment experience.