WHY ETFS ARE NOT PERILOUS
Active management has the tendency to underperform. Backers of active management emphasize the likely liability inherent in index funds. Such a management style can provide hefty gains since active managers can choose the stocks they expect to be most profitable and sell those that impede the fund’s profitability. However, it can also lead to bigger losses in case the manager’s preferred assets fail to deliver. Passively managed ETFs have proven to perform better than its counterparts. Also, actively managed funds charge higher fees than passive ones, meaning shareholders’ net profits can be substantially lower than the fund’s overall returns.
Low expenses and fees. Asset turnover is low; hence, the expenses and fees yielded by shareholders are much lower than holders of comparable mutual funds. Lower turnover ratio is tantamount to less work and documentation, which results in minimum operational costs. ETFs need not to liquidate assets to cover redemptions since it trade on the open market. Fund rebalancing do not occur often. The purchase or sale of shares incurs nominal commission fees, those who use a buy-and-hold technique can sidestep this expense.
Simple and transparent investments. Most ETFs are index funds, making safe safe investments. The fund primarily invests in the same stocks as a particular index to mirror its returns. While ETFs are susceptible to the risk brought by the underlying index, it only require minimal maintenance. Indexed ETFs purchase and sell securities when the underlying index injects or ditches them from the list. These funds provide a high level of transparency since they invest in the exact securities as a specific index. Investors can easily access the portfolios of the funds and it do not change much over time.
Tax efficiency. Indexed ETFs, because of in-kind redemption mechanism, low turnover ratios, and market-based trading, generate lower capital gains distributions unlike actively managed funds. Capital gains distributions, depending on the life span of investment, may be taxed at standard or long-term capital gains rates. In most cases, indexed ETFs increase shareholders’ tax burdens when shares are redeemed or sold for a profit. Certain funds earn regular dividend distributions, raising the taxable income of holders.
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