I’ve already written about Why ETFs Beat Individual Stocks but did you know ETFs also beat mutual funds? Though Exchange Traded Funds (ETFs) and mutual funds both allow investors to own a group of investments by making just one purchase, ETFs have several distinct advantages over mutual funds:
ETFs vs mutual funds
- ETFs have Low Minimum Investment and Trading Flexibility
- ETFs typically have lower Expense Ratios
- ETFs offer trading flexibility
- ETFs also offer some tax advantages
- ETFs offer protection against possible fraud
- ETFs have opportunities for options and short selling
ETFs offer options and short selling
Options are investments that grant you the right to buy or sell a stock at a certain price at any point within a fixed period of time. If the stock goes up during that time and you have the right to buy it at a lower price, you make money. Short selling lets investors profit from a decline in the price of a stock. For instance, if you think oil prices will soon plunge, you might sell short the stock of an oil company, expecting its share price to plummet along with oil prices.
Options and short selling are both available with ETFs but not with mutual funds. Though anyone can buy ETF options or sell short ETFs, usually it’s best for most investors to avoid these strategies, as they’re both very risky. Very risky.
ETFs are more flexible than mutual funds
But just because they’re able to perform a certain function, that doesn’t mean you should rush out and try it yourself. Only the most experienced investors, with deep knowledge and understanding of the options markets should ever attempt to use ETFs in this way.
But you DO have the option.
How to buy ETFs
You’ll have to open an account at a brokerage company. Click the links below to get further information:
- Scottrade – you can buy Focus Morningstar ETFs commission free!
- Etrade – E*Trade helps you get started investing in three easy steps
- TradeKing – offers regular trades and broker assisted trades for only $4.95
- tradeMonster – offers mobile trading
- Zecco – has commission free trades available
- ShareBuilder – invest for only $4 on an automatic investment plan