Question

Discuss the advantages and disadvantages of ETFs (Exchange Traded Funds) to the banking industry.

Answer 1

Advantages of Exchange Traded funds

Cost-effectiveness

An exchange traded funds is its cost effectiveness. The fund will invest in upper fifty different listed stocks but you have to pay only the brokerage fee. An Exchange Traded funds also have less management fees than an actively managed fund.

Diversification

The second big benefit is the diversification exchange traded funds offer both within a single asset type and in the range of funds available. As provided an Exchange Traded funds particularly invests in many stocks a product which analyse the asx 200 for instance, may spread your money across the 200 companies which form the index.

Convenience & transparency

Exchange traded funds also provide all the benefits of stocks. As an investor you have the permission to all the features that are available to stock investors including the option to short or use limit and stop orders not to mention being able to buy and sell as you wish while the exchange is open.

Dis-advantages of Exchange Traded funds

As with any financial product, there are risks associated with exchange traded funds. The buying and selling price of your shares in the fund can also different from the net asset value of the underlying index or reducing your return.

Volatility

Even after the diversification an exchange traded fund offer ,this does not make your investment vulnerable to volatility in the market and you can still suffer more losses in a market.

Currency risk

Finally, if your exchange traded funds of choice invests overseas increase or decrease in the Australian dollar can impact your returns. Funds that offer exposure to markets may also be more volatile. You may even be knocked by foreign taxes if the fund you invest in is located outside Australia.