1. Better Portfolio Liquidity
ETFs are more liquid than mutual funds and can be freely traded intraday like stocks, while mutual fund transactions occur once the markets close. The most liquid are the biggest ETFs which prices change every second due to the big volumes traded by investors.
2. Lower Portfolio Cost
Expense ratios tend to be lower than those of mutual funds because many ETFs are passively managed. Mutual funds, on the other hand tend to be actively managed.
By periodically investing in an index fund, the know nothing investors can actually outperform most investment professionalsWarren Buffett
Most mutual funds underperform their benchmarks and this statement is common knowledge nowadays. According to different research sources the percentage of the funds losing the market battle is somewhere between 80 and 90 percent. This only proves how challenging it is to extract the top 10-20 percent of the best performing asset managers. Only those investors who have outstanding fund research and due diligence process in place have a chance to find the true diamonds.
Having taken into account the above statistics, it makes sense to have in your portfolio considerable exposure to index tracking funds. That way you can increase your chances to stay in line with your reference benchmark. This approach makes a lot of sense as index tracking funds leave you with peace in mind that you won’t be at least lagging the market. On top of that they come at a lower cost, as ETF’s charge a lot less that mutual funds.
3. Portfolio Diversification
Purchasing an ETF gives you ownership in a basket of stocks versus a single company. An ETF can guard against volatility if certain stocks within the ETF fall. This removal of company-specific risk is the biggest draw for most ETF investors.
On top of the above three fundamental benefits, another one is the exposure ETFs can give a portfolio to alternative asset classes, such as commodities, currencies, real estate, cryptos or investment themes like the ESG.