Benefits of ETFs - Fidelity (2024)

For nearly a century, traditional mutual funds have offered many advantages over building a portfolio one security at a time. Mutual funds provide investors instant diversification, professional management, relative low cost, and daily liquidity.

Exchange-traded funds (ETFs) take the benefits of mutual fund investing to the next level. ETFs can offer lower operating costs than traditional open-end funds, flexible trading, greater transparency, and better tax efficiency in taxable accounts. As with all investment choices there are elements to review when making an investment decision. Most informed financial experts agree that the pluses of ETFs overshadow the minuses by a sizable margin.

Positive aspects of ETFs

ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.

Trading flexibility

Traditional open-end mutual fund shares are traded only once per day after the markets close. All trading is done with the mutual fund company that issues the shares. Investors must wait until the end of the day when the fund net asset value (NAV) is announced before knowing what price they paid for new shares when buying that day and the price they will receive for shares they sold that day. Once-per-day trading is fine for most long-term investors, but some people require greater flexibility.

ETFs are bought and sold during the day when the markets are open. The pricing of ETF shares is continuous during normal exchange hours. Share prices vary throughout the day, based on the changing intraday value of the underlying assets in the fund. ETF investors know within moments how much they paid to buy shares and how much they received after selling.

The intraday trading of ETF shares makes it easy to move money between specific asset classes, such as stocks, bonds, or commodities.

Trading traditional open-end mutual funds is more challenging and can take several days. First, there is typically a 4:00 pm Eastern standard time cutoff for placing open-end share trades. That means you do not know what the NAV price will be at the end of the day. It is impossible to know exactly how much you will receive when selling shares of one open-end fund or know how much you should buy of another open-end fund.

The trade order flexibility of ETFs also gives investors the benefit of making timely investment decisions and placing orders in a variety of ways. Investing in ETF shares has all the trade combinations of investing in common stocks, including limit orders and stop-limit orders and options. ETFs can also be purchased on margin by borrowing money from a broker. Every brokerage firm has tutorials on trade order types and requirements for borrowing on margin.

Short selling is also available to ETF investors.

Portfolio diversification and risk management

Investors may wish to quickly gain portfolio exposure to specific sectors, styles, industries, or countries but do not have expertise in those areas. Given the wide variety of sector, style, industry, and country categories available, ETF shares may be able to provide an investor easy exposure to a specific desired market segment.

ETFs are now traded on virtually every major asset class, commodity, and currency in the world. Moreover, innovative new ETF structures embody a particular investment or trading strategy. For example, through ETFs an investor can buy or sell stock market volatility or invest on a continuous basis in the highest yielding currencies in the world.

In certain situations, an investor may have significant risk in a particular sector but cannot diversify that risk because of restrictions or taxes. In that case, the person can short an industry-sector ETF or buy an ETF that shorts an industry for them.

For example, an investor may have a large number of restricted shares in the technology industry. In that situation, the person may want to short shares of a technology sector ETF. That would reduce one's overall risk exposure to a downturn in that sector.

Lower costs

Operating expenses are incurred by all managed funds regardless of the structure. Those costs include, but are not limited to, portfolio management fees, custody costs, administrative expenses, marketing expenses, and distribution. Costs historically have been very important in forecasting returns. In general, the lower the cost of investing in a fund, the higher the expected return for that fund.

ETF operation costs can be streamlined compared to open-end mutual funds. Lower costs are a result of client service–related expenses being passed on to the brokerage firms that hold the exchange-traded securities in customer accounts. Additionally, ETFs do not charge a 12b-1 fee, the annual marketing fee.

Brokerage companies issue monthly statements, annual tax reports, quarterly reports, and 1099s, and ETFs are generally included in those statements. The reduced administrative burden of service and record keeping for thousands of individual clients means ETF companies have a lower overhead, and at least part of that savings is passed on to individual investors in the form of lower fund expenses.

Another cost savings for ETF shares is the absence of mutual fund redemption fees. Shareholders in ETFs avoid the short-term redemption fees that are charged on some open-end funds. For example, the Vanguard REIT Index Fund Investor Shares () has a redemption fee of 1% if held for less than one year. The Vanguard REIT ETF () is the exact same portfolio and has no redemption fee.

Tax benefits

ETFs have a major tax advantage compared to mutual funds. Due to structural differences, mutual funds typically incur more capital gains taxes than ETFs. Moreover, capital gains tax on an ETF is incurred only upon the sale of the ETF by the investor, whereas mutual funds pass on capital gains taxes to investors through the life of the investment. In short, ETFs have lower capital gains and they are payable only upon sales of the ETF.

Benefits of ETFs - Fidelity (2024)

FAQs

Benefits of ETFs - Fidelity? ›

ETFs can offer lower operating costs than traditional open-end funds, flexible trading, greater transparency, and better tax efficiency in taxable accounts. As with all investment choices there are elements to review when making an investment decision.

Are Fidelity ETFs worth it? ›

“While Active ETFs offer the potential to outperform an index,” they write, “these products may more significantly trail an index as compared with passive ETFs.” So if you feel that 98% of ETFs are passively managed for a reason, a Fidelity ETF may not be a fit.

Does Fidelity charge for ETFs? ›

$0.00 commission applies to online U.S. equity trades, exchange-traded funds (ETFs) and options (+ $ 0.65 per contract fee) in a Fidelity retail account only for Fidelity Brokerage Services LLC retail clients. Sell orders are subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal).

What is the downside of ETFs? ›

For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.

Should I just put my money in ETF? ›

ETFs can be a great investment for long-term investors and those with shorter-term time horizons. They can be especially valuable to beginning investors. That's because they won't require the time, effort, and experience needed to research individual stocks.

What is Fidelity's best performing ETF? ›

The largest Fidelity ETF is the Fidelity Wise Origin Bitcoin Fund FBTC with $9.28B in assets. In the last trailing year, the best-performing Fidelity ETF was FBCG at 45.05%. The most recent ETF launched in the Fidelity space was the Fidelity Yield Enhanced Equity ETF FYEE on 04/11/24.

How do ETFs make money? ›

Most ETF income is generated by the fund's underlying holdings. Typically, that means dividends from stocks or interest (coupons) from bonds. Dividends: These are a portion of the company's earnings paid out in cash or shares to stockholders on a per-share basis, sometimes to attract investors to buy the stock.

How does Fidelity make money on ETFs? ›

For iShares® ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive long-term marketing program that includes promotion of iShares® ETFs and inclusion of iShares® funds in certain FBS platforms and investment programs.

Which ETFs are free on Fidelity? ›

Commission-Free ETFs on Fidelity
Symbol SymbolETF Name ETF NameDividend Date Dividend Date
IJHiShares Core S&P Mid-Cap ETF2024-03-21
IJRiShares Core S&P Small-Cap ETF2024-03-21
IEMGiShares Core MSCI Emerging Markets ETF2023-12-20
ITOTiShares Core S&P Total U.S. Stock Market ETF2024-03-21
5 more rows

How does Fidelity ETF work? ›

How ETFs work. An ETF is bought and sold like a company stock during the day when the stock exchanges are open. Just like a stock, an ETF has a ticker symbol and intraday price data can be easily obtained during the course of the trading day.

Is it possible to lose money on ETF? ›

An ETF with a low risk rating can still lose money. ETFs do not provide any guarantees of future performance. As with any investment, you might not get back the money you invested.

Why I don't invest in ETFs? ›

Low Liquidity

If an ETF is thinly traded, there can be problems getting out of the investment, depending on the size of your position relative to the average trading volume. The biggest sign of an illiquid investment is large spreads between the bid and the ask.

Has an ETF ever gone to zero? ›

It is unlikely for its asset to go up 100% in a single day and so, an ETF can't become zero. An ETF follows a particular index and the securities are present at the same weight in it. So, it can be zero when all the securities go to zero.

How much of your money should be in ETFs? ›

You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.

How long should you stay invested in ETF? ›

Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.

Is it better to hold mutual funds or ETFs? ›

The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.

Are Fidelity ETFs better than Vanguard? ›

While Fidelity wins out overall, Vanguard is the best option for retirement savers. Its platform offers tools and education focused specifically on retirement planning.

Is Vanguard or Fidelity better for ETFs? ›

Both Fidelity and Vanguard have a wide variety of low-cost mutual funds and ETFs. If you're simply looking at the options offered by each firm, Fidelity has more options available.

What is the downside to Fidelity? ›

thumb_down_off_alt Cons

Though Fidelity largely avoids nuisance fees such as charges for transferring an account out, its margin rates and options fees are higher than brokers that cater to active traders. Its desktop trading platform, Fidelity Active Trader Pro, could use an overhaul.

Is Fidelity Contrafund better than the sp500? ›

Key Morningstar Metrics for Fidelity Contrafund

The fund's roughly 13% annualized gain over the past decade beat the S&P 500 (the fund's broad-market prospectus benchmark) and ranked among the best-performing third of funds in either the large-blend or large-growth Morningstar Categories.

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