ETF benefits for investors

• ETFs make investing simple and accessible by offering instant diversification across stocks, bonds, and other assets in a single trade.
• Lower costs and tax efficiency give ETFs an edge over other investment options, helping investors potentially grow wealth faster.
• Flexible trading and transparency allow investors to buy, sell, and monitor holdings in real time—an advantage in both stable and volatile markets.

Exchange traded funds (ETFs)—often described as a basket of securities that can be bought and sold in a single trade on a stock exchange—are a lot like streaming services.

Instead of buying individual movies or TV shows, you get access to a wide range of entertainment for a fee, giving you flexibility to watch what you want, when you want. Whether you’re in the mood for something fast-paced or something more steady, a streaming service lets you choose without having to buy each title individually.

Similarly, ETFs give you the freedom to invest the way you want—without the uncertainty, expense, or complexity of picking individual securities.

Since debuting in 1993, ETF usage has grown tremendously. Today, investors are unleashing the power of ETFs to grow their money—and meet their investment objectives.

7 key benefits of ETFs

ETFs are a popular tool for today’s investors for one essential reason: they make investing easier for you. They offer a simple and efficient way to build a portfolio the way you want—and set you on the path to achieving your investing goals. Their effectiveness stems from a range of benefits, which can help investors save money on costs and taxes and diversify with broad or targeted exposures.

From diversification to cost efficiency and transparency to trading flexibility, let’s dive into seven benefits that are attracting investors around the globe to these investment vehicles.

1. Portfolio diversification

Why it matters: Diversification gives you the potential to reduce concentration risks.

ETFs offer one of the easiest ways to diversify a portfolio by providing you with building blocks across a range of asset classes. Some ETFs track the performance of benchmark indexes that track a long list of individual securities, such as the S&P 500®. Others focus on specific sectors, like Technology or Health Care, or even invest across different regions around the world.

By using ETFs to build a portfolio, you’re adding diversification that spreads across asset classes, geographies, and sectors—helping lower the risk that one of your investments delivers weak returns and hurts the performance of your overall portfolio. Instead of predicting individual winners or losers by investing in single stocks, ETF diversification helps you capture market growth and potentially higher returns in multiple investment opportunities.

2. A wide variety of investment choices

Why it matters: With extensive ETF options available, you can access nearly every market segment—including niche market opportunities.

As ETF popularity has boomed over the last few years, so has the number of market exposures available within ETFs. In fact, there are more than 14,000 ETFs available globally.¹ That means you can use ETFs to meet your investment objectives by conveniently accessing both broad and targeted exposures, including a variety of:

• Asset classes: Equities, fixed income, commodities, currencies, alternatives, multi-asset
• Geographies: Global, regional, developed markets, emerging markets, single country
• Sectors, industries, styles: Equity exposures such as biotech, insurance, transportation, growth, value, large/mid/small cap; fixed income exposures such as high yield, bank loan, aggregate
• Long-term investment themes: Multi-generational themes such as sustainability or technological advances
• Focused investing styles: Dividend, growth, momentum, size, value, volatility

3. Low costs

Why it matters: ETFs’ low costs could help you save money over time and potentially help you reach your goals faster.

Passively managed ETFs typically have lower management fees and operating expenses than mutual funds. Transaction costs are minimized due to the low turnover of most ETFs and the indexes they track. When fees and expenses are low, you have the potential to keep more of your returns.

How much lower are ETF costs? Both ETFs and mutual funds have an expense ratio, which includes management fees and the fund’s total annual operating expenses. The median expense ratio for index ETFs is lower than that of index mutual funds, historically 0.58% for ETFs versus 0.90% for mutual funds.²

Additionally, ETFs trade commission-free on many brokerage platforms, which can lower the total cost of owning an ETF.

4. Trading flexibility

Why it matters: ETF liquidity allows you to get in and out of markets quickly, which can be especially helpful in volatile markets.

In times of market volatility, the ability to trade matters. Investors want to be able to buy and sell securities quickly, easily, and at an attractive cost. During more severe bouts of volatility, the market for individual securities sometimes becomes harder to trade, while ETFs that hold those same securities can continue trading throughout the day.

That ease of trading—or liquidity—is one of the defining features of ETFs. Think of it like concert tickets. Some tickets are in constant demand and can be resold quickly at transparent prices—similar to many widely traded ETFs. Others may take longer to sell and require more effort to find a buyer. ETFs help you stay closer to that first scenario, offering the ability to act when it matters most.

5. Transparency

Why it matters: ETF holdings are available daily, so you can know exactly what you own.

The holdings of most ETFs are fully transparent and made available daily. This disclosure means you know what your ETFs own in real time, allowing you to make more informed investment decisions with greater accuracy.

This is important because sometimes mutual funds may seem different on the surface, but have overlapping holdings, which can heighten risk to your portfolio.

6. Trades throughout the day

Why it matters: Because ETFs trade throughout the day, you can respond to market movements in real time and manage your portfolio with greater precision.

At any time during the trading day, ETF shares can be bought and sold through brokerage accounts at their current market prices, which may be slightly more or less than their net asset values (NAV). There are no minimum holding periods.

When trading ETFs, you can employ a wide range of techniques to react to market movements, shift allocations, and deploy investment strategies, such as buying on margin, short selling, and placing limit orders.

The trading flexibility of ETFs is a benefit compared to mutual fund shares, which are priced once at the end of the trading day. Mutual fund shareholders purchase and redeem shares at the fund’s closing NAV.

7. Tax efficiency

Why it matters: Since ETFs are tax efficient, they can help you keep more of what they earn.

ETFs have a unique tax-efficient structure, helping investors with taxable accounts keep more of what they earn. Because ETFs generally track market indexes, turnover is usually low, resulting in lower capital gains taxes.⁵

ETFs also benefit from the ability to transfer securities in and out of the portfolio in the most tax-efficient manner, known as the in-kind creation and redemption process. When ETF investors sell their share on the exchange to other investors, the ETF portfolio manager does not need to buy or sell any of the ETF’s underlying investments.

When an investor decides to sell shares of a mutual fund, on the other hand, the fund manager may sell a portion of the fund’s security holdings to deliver cash in the amount of an investor’s position. This sale may generate a realized taxable gain, and taxes on those gains are absorbed by the remaining shareholders in the fund.

Frequently asked questions