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Monday, January 19, 2009

Advantages of ETF Wraps

Exchange Traded Funds (ETFs) wrap is growing in popularity. There are a number of reasons for it. Below are some advantages that ETF wraps offer over mutual fund wraps and other trading instruments.
  1. Expense ratio: ETFs has lesser expense ratio (an average of 36 basic points) than mutual funds (an average of 88 basic points for low cost index funds). Although both ETF wraps and mutual fund wraps include other costs like management fees, those are almost same for both.
  2. Tax benefits: ETFs wraps are more tax savvy than mutual fund wraps. Unlike mutual funds which are taxed for embedded capital gains, ETFs are taxed only when an investor sell his holdings.
  3. Liquidity and Intraday Trading: ETFs are much more liquid trading instruments than mutual funds. And as ETFs can be intraday traded they offer traders the opportunity to profit from intraday price changes. This is highly beneficial for active traders.
  4. Portfolio Management: ETF wraps are much more flexible and manageable than mutual fund wraps. ETFs can be used to diversify trading portfolios, for quick capital gains, for hedging risks, for getting fixed incomes, and for profiting from certain sectors or markets.
  5. More transparent: With ETF wraps traders/investors will always informed about his portfolio as ETF firms disclose the asset value on daily basis. This makes ETFs much less susceptible for scandals.
But the trading commissions included with ETF wraps are much higher and this can cause problems for investors, especially for dollar cost averaging investors. The best solution is to trade through a discount broker or brokers who offer commission-free accounts.

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posted by NobleTrading at 9:25 AM

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