There are many types of investments out there today just waiting for you to sink your money into. As is understandable, you want to make sure that each investment you make is going to pay off in the form of a positive return in the end. Exchange traded funds have emerged as a popular alternative for many in recent years. As with any investment, it all depends on your risk tolerance and overall needs to cash flow. Continue reading to learn how to choose the right investment for you.
Tax Efficiency
As you compare ETF vs mutual fund, is important to consider tax efficiency. On that account, exchange traded funds may very well come out ahead in the end. When compared to mutual funds, you will find the capital gains distributions are much lower due to the way ETFs are designed and then redeemed. Many mutual funds carry with them a variety of tax consequences the moment that you redeem the share. This is the not the case with exchange traded funds, as they are exchanged in kind. As such, the IRS does not deem them to have actually been sold. Because of this, you will not incur a taxable event when you go to redeem your exchange traded fund.
Dividends Do Not Always Make An Investment Better
Keep in mind that a dividend payment attached to an exchange traded fund does not always equate to a bigger yield. Many investors have recently took to ETFs as they try to develop a system of solid dividend returns, but caution should be exercised here. There are many ETFs that offer a choice of dividends, but not all of them will come with the type of yield that you are hoping for. You will want to take a look at all of the variety of options available to you within your level of risk tolerance, and then choose the one that you are most comfortable with. This is how you will come out with the maximum yield possible under the circumstances.
Not All ETFs Are the Cheaper Option
While an exchange traded fund should be appealing to many investors, gobankingrates.com will tell you that it is not always the cheaper option. You will want to take a look that costs associated with the particular fund you are going to invest in. Some ETFs will cost less than five basis points, while others can go up to as much as two percentage points. These costs vary so widely. If you are not careful, the expenses can eat into your yields over time.
When considering the right investment for you, take a look at your complete portfolio. Examine your risk factors and what you want out of an investment. Then, choose wisely and stick with your plan.
