Exchange-trade funds or ETFs are popular investment options among individuals because they can trade them just like stocks. Most ETFs track an index of some kind, whether it is a stock market sector, bonds, or even currencies.
In contrast with mutual funds with a fixed price, an ETF’s price changes throughout the trading day as it tracks its underlying assets. In this way, ETFs are seen as more dynamic in their investment options than mutual funds.
A mutual fund is an investment where money from several investors is pooled together and invested in securities such as stocks, bonds and money markets, and instruments. The money is invested by professionals called portfolio managers according to stated goals and policy by the fund company (which is often a financial institution). Mutual funds allow small-time investors to diversify their holdings in a single investment.
ETFs are more liquid
ETFs are seen as more liquid than mutual funds. Traders can trade ETFs during the day, while a mutual fund’s price cannot change until after the market closes. The bid-ask spread or difference between what someone might buy it at versus its selling price for an ETF is much lower since they have continuous pricing throughout the trading day.
Investors have better opportunities to sell their positions before closing time which makes ETFs a desirable investment option, especially in volatile markets where quick decisions need to be made. Continuous pricing also makes it easier for I-banks to create derivatives based on popular ETFs since they already have live market prices to reference from.
Trading fees are less with ETFs
The trading fees for ETFs are also lower than mutual funds. Investors would be charged $4 if they bought a unit of equity in a mutual fund, while the same transaction would only cost $1 and some cents through an ETF.
Traders can short ETFs
ETFs enable investors to go long and short, which is impossible with most mutual funds. Mutual fund holders can only buy new shares when they redeem existing ones. In contrast, ETF holders don’t face such redemption issues since there is no limit on the number of shares created or redeemed under normal market conditions.
Ease of use for buybacks and dividends
Repurchase agreements (repo) and reverse repos are standard practices in securities lending. In a repo, the lender temporarily transfers securities to the borrower in exchange for cash. The reverse repo is when an investor borrows money from his broker-dealer by handing over securities as collateral.
This kind of transaction often takes place at the end of a trading day to avoid incurring unnecessary overnight fees.
In comparison, mutual funds do not have such flexibility because they cannot transfer their shares to other investors or book transactions after market hours since all their transactions happen between 9:30 am and 4 pm Eastern time only.
ETF shareholders get voting rights
ETFs offer a form of corporate governance since shareholders get to vote on a board of directors with a simple majority vote. In comparison, mutual funds only offer a non-binding vote on executive compensation and often give the fund manager too much discretion over voting resolutions.
ETFs can be designed to follow more complex index strategies
ETFs allow investors to invest in more than one asset class such as stocks, bonds, or commodities through benchmark indices or thematic portfolios similar to mutual funds but with minor tracking errors and more efficiency.
While ETFs do not have a replica of any particular asset class, they can track exposures to different sectors and themes of investing. Mutual Fund companies do not issue such services since there is no legal framework in many jurisdictions, including Dubai.
ETFs are likely to be the investment product of choice for many investors in Dubai
ETFs have become an essential tool for retail and institutional investors worldwide. As they continue to grow, their popularity will attract more capital, allowing companies to raise money by issuing new shares.
ETFs account for 10 percent of daily trading volume on major exchanges. While mutual funds are still much more significant than ETFs globally, this is changing as ETFs keep growing faster, allowing them to catch up with mutual fund asset levels over the next few years.