How are ETFs different from index funds? Comment on their popularity and the future of EFTs.
The ETF's have the following advantages over a index funds:
1. Support the same types of orders as stock, like: limited, best price, stop-loss, etc. 2. Can be purchased at any time through out the trading session, while the index funds net asset value only mark the end of each session.
3. The consequence of points 1 and 2 is that at the time of purchase will know exactly the price you will pay per share and that can exploit the most favorable time of day to buy. In a traditional fund does not know what it will cost each share at the time of ordering and it can only be purchased at the end of each trading session.
4. Management fees and deposit of the ETF are usually significantly smaller than those of traditional funds, which has a major influence on the long term profitability.
5. ETFs tend to pay dividends. That means they are valid for a regular income with which to address other investments (ETF, shares, property) or any expenses (credit, consumer spending, etc) Without having to sell the shares.
6. The ETF is invested 100%, while the index funds have to maintain a liquidity ratio required (around 5%) to meet the repayments. This differs from long-term profitability important for ETFs, since equity is more profitable than fixed and that 5% (approximate) fixed income funds to be kept by traditional means a drag for profitability.
7. With ETF's can implement strategies that are not possible with index funds.
We already have explained the main differences between ETF and index funds, but for better understanding, in the next chart we have it more clearly:
The only advantage of traditional funds to ETFs in some markets such as Spanish is that traditional index funds have a more favorable taxation. For many investors make transfers from one fund to another can be an advantage. For...
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