René Nourse, CFP®
You don’t have to be afraid of Spiders anymore! Well, at least not the ones mentioned in your investment portfolio!
Standard & Poor’s Depositary Receipts (SPDRS), or Spiders as they are more commonly known, were one of the first exchange-traded funds (ETFs) to hit the market over 20 years ago in 1993. Covering numerous sectors of the S&P 500, Spiders now exist for other defined market capitalization groupings, and present those who hold them a variety of potential growth opportunities.
What is an ETF?
Before we dive into the details, let’s explore the ETF. This is a type of investment that combines the diversification and cost-effectiveness of index funds with the trading flexibility of stocks. ETFs are “baskets” of equities, shares of which are traded on an exchange. They’ve increased in popularity over the last few years, resulting in increasing numbers and types. Like stocks, ETFs can be traded throughout the day at real-time prices. Like index funds, ETFs usually have low expense ratios and portfolio turnover because they aren't “actively” managed. Managers simply choose the underlying stocks, so that the “basket” matches the makeup of the appropriate index.
Why would you want an ETF in your portfolio?
One advantage of an ETF is the potential to introduce tax efficiency in your investment portfolio. Unlike mutual funds, ETFs don’t need to be sold to satisfy investor redemptions—that's a move that can create taxable capital gains for other mutual fund shareholders.
A potential drawback of ETFs is that since they are so easy to trade, it could be tempting to trade them more frequently. So it’s important to remember to stay focused on your long-term financial goals instead of jumping into the hottest new ETF, day in and day out.
Investing in ETFs also gives investors diversification protection, somewhat like mutual funds. Portfolio risk is reduced because of the wide array of different asset classes. This could possibly enhance your investment returns. To learn more about ETFs or for help sorting out which ones may fit your portfolio best, talk to your financial advisor. We promise she won’t bite!
Photo Source: freedigitalphotos.net, pong