While there’s a plethora of choices to choose from, a young investor still needs a big enough amount of capital to build a diversified portfolio. ETFs make it possible to have diversification with a relatively smaller amount of capital. Here are other benefits of ETFs for younger investors.
Wide Variety of ETFs
The very ETFs that were introduced in the late 19980s and early 1990s were relatively plain products that followed equity indexes such as the S&P 500 index and the Dow Jones Industrial Average.
Since then, the variants of available ETFs has expanded to include practically every asset class, like stocks, bonds, real estate, commodities, currencies, and international investments, as well as every sector imaginable and many niches.
The competition among ETF providers has led to the introduction of ETFs that are very specific in focus, so younger investors can find specific ETFs that follow markets, or segments, that may be specifically attractive to them.
There are also a number of inverse ETFs, which trade in the opposite direction to an asset or market, and leveraged ETFs that magnify results two or three times.
The fact that most ETFs are very liquid and can be traded throughout the day is a major advantage over index mutual funds, which are priced only at the end of the trading day.
This becomes a particularly crucial differentiating factor for the young investor, who may like to exit a losing investment immediately in order to preserve limited capital.
The liquidity feature of ETFs also provides investors the ability to use them for intraday trading, similar to stocks.
ETFs in general have lower expense ratios than mutual funds. In addition, although they are bought and sold like stocks, many online brokers offer commission-free ETFs, even for investors with relatively small accounts.
This can be a big help to young investors since high fees and commissions could inevitably chip away from their account balance.