Know the difference between Passive and Active ETFs
Exchange traded fund investments or ETF investments hold assets such as stocks, commodities or bonds and are traded in a similar fashion to stocks. They are used as investing vehicles that can hold hundreds of companies under one fund. ETF investments are considered attractive because of their low costs, tax efficiency and stock-like features. However, there are two ways to utilize ETF investments. Here we’ll go the differences between passive and active ETF investing.
Passive ETF Investments
ETF investments were created in the early 1990s to provide users a single security to track an index and are capable of buying and selling stocks throughout the day. By using ETF investments, investors are, in theory, able to buy and sell securities that make up an entire market in a single trade. Because of this, investors are given high amounts of flexibility to buy or sell at any time throughout the day. This is an advantage for investors who prefer to buy and hold or prefer to manage their investment themselves. The investment strategy of buying and holding is considered passive, but still effective. Through using a passive approach, traders can track a stock index and earn as the index earns. This hands off approach means lower fees for investors, but less control. Because of this ETF investments can provide a convenient and low cost way to implement indexing or passive management.
Active ETF Investments
For many investors, the returns of a passive ETF investment strategy are not enough. Actively managed ETF investments have the ability to earn higher revenues. The use of intraday trading allows investors to track the market and trade, much like a stock but with a higher possible benefit. These include market timing, sector rotation, short selling and buying on a margin. In comparison to passive investing, active investors do not track a stock index but attempt to earn more beat the index. Meaning all of the active investment strategies used in stocks can be used in ETF investments.
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