The basic principle of investing is to save some percentage of your income each pay period and put the money in the security that should grow over time. Index mutual funds have been a blessing to such investors who invest small amounts time-to-time. Another in the list is, “Exchange-Traded Funds (ETFs)” which have been boon for many investors who wanted to get huge exposure to the market. More importantly, ETFs are no any different from index mutual funds; in fact, both are similar to each other in many ways.
Well, for starters, an ETF, or Exchange-traded fund, is a marketable security that tracks various assets just like an index fund. But, unlike mutual funds, the ETF trade likes a common stock on a stock exchange. Also, an ETF does not have its NAV calculated like a mutual fund does. But, the main question is, Are ETFs suitable for investors who only have a small amount of money to invest on a periodic basis?
Well, there are factors that investors should consider.
- While comparing with mutual funds, we find out that ETFs provide the same facility to invest in many sectors of the economy around the world. Since a large number of ETFs and funds available, it is important to decide which sector or sectors hold the most potential. Once you figure out which sector holds the most potential, you can easily search for particular ETFs or funds to pursue your investment goals.
- The second best thing to use ETFs for investing is, ETFs do not sustain any capital gains until one sell shares in the fund, at which time one may be liable for the taxes. But, in case of index funds, one must pay capital gains taxes on any gains that are reported. Means, an investor will be liable to pay taxes when he/she sell shares of companies he/she own for a profit. So, ETFs give you more control in taxable events.
- The third reason for why investing in Exchange-Traded Fund (ETF) is better than index fund is the minimum investment. As if you are aware, many index funds require their shareholders to open an account with some minimum investment and to maintain an investment level to avoid the maintenance charge. However, ETFs do not have any such kind of fees. In fact, to buy an ETF, an investor will only have to pay the price of one share of the ETF plus commission and fee. If we compare these two against each other then it is clear that ETFs require a minimum investment.
- Buying & Selling Shares is another important thing to consider. If you remember, one who is using ETFs buy and sell it like stocks. So, where there is stock, there is a broker. And the costs may vary with a broker to broker. For example, if you invest $250 per month then you will be paying a commission fee to the broker on a monthly basis which will lower your returns. But, there are no charges for investing in an index fund. However, there is management fee to sell shares of the index fund.
Final Thoughts: –
Since your goal is to invest a small amount of money on each payday, it is important to check for the sector(s) you want exposure to. Whether you believe it or not but selecting right sector make a huge difference in the performance of the portfolio. ETF has its strengths and flaws so make no mistake while investing small periodic investments in ETF.