Published by FrankNez Team.
ETFs, or exchange traded funds, are a useful and fairly safe investment tool that can help you earn money passively. ETFs are popular not only because they help you diversify your portfolio but also because they are transparent, carry low risk, have relatively low fees, and provide tax benefits.
However, ETFs also have some drawbacks because of which you may be thinking of investing in alternatives.
Read ahead to find out about why you should think about alternatives to exchange traded funds and some alternatives that you can invest in.
Why Should You Think About Alternatives to ETFs?
While exchange traded funds can help investors reach their investment goals with little effort, you should also consider alternatives because:
- ETFs may allow less diversification of your portfolio if you are limited to large-cap stocks because of narrow group of equities in the market index
- Costs of investing in ETFs may be higher than costs of investing in specific stocks
- Although the risk is relatively low, the dividend yields may also be comparably low, especially in comparison to high dividend stocks
Alternatives To ETFs You Should Consider
So, if you are considering alternatives to ETFs, here are 3 options you can try. But before we discuss these, you should consider Vues as an alternative to ETFs with HALO Technologies. A vue is a relatively new concept and gives you access to some of the most innovative companies for investment.
HALO Technologies also has 28 read-to-invest portfolios made of these companies, so be sure to check them out.
1. Index Mutual Funds
An index mutual fund is a professionally managed investment fund that pools money from multiple investors to purchase a portfolio of stocks, bonds, and/or other securities.
Index mutual funds and ETFs have a similar structure in that they both represent managed pools of individual securities such as stocks. They also offer exposure to a wide array of niche markets and asset classes.
Index mutual funds vs. exchange traded funds
You should choose index mutual funds over ETFs if:
- You invest frequently and use dollar-cost averaging since mutual funds can be purchased in fractional shares, allowing you to invest the same amount each time.
- You are hoping to surpass your benchmarks.
- You are investing in less efficient markets that are less popular and thus provide greater opportunities through active portfolio management.
You should choose ETFs over mutual funds if:
- You trade actively as ETFs allow for intraday trades, limit orders, stop orders, and short selling.
- You are looking for a tax efficient investment vehicle as ETFs are more tax effective than mutual funds.
Annuities are financial contracts that offer a guaranteed stream of regular income. In the first (or annuitization) phase, investors make lump sum or routine payments. These investments accumulate interest and are later returned to investors in the form of periodic payments.
Annuities vs. exchange traded funds
You should choose annuities over ETFs if:
- You are looking for a safe investment as ETFs do not guarantee an income or ensure good performance of your investments. Annuities, on the other hand, guarantee moderate income and growth.
You should choose ETFs over annuities if:
- You are looking for a low-cost investment as ETFs require lower fees and commissions.
- You value higher returns as ETFs continue to grow with the market while annuities do not.
- You are looking for a tax-efficient option because payments received in the annuitization phase of annuities are taxed like ordinary income.
- You want to make more flexible investments as ETFs offer more options in payments and distributions and usually impose fewer constraints.
3. Individual securities
Last but not the least, individual securities are individual financial assets that can be traded on the market. Since investing in individual securities entails putting money into specific assets, the performance of the investment is highly dependent on the performance of the asset.
As a result, individual securities carry both the potential for high growth as well as relatively high risk.
Two major types of individual securities are common stocks and corporate bonds.
- Common stocks: Publicly owned companies owned by institutions and individuals that purchase shares or stocks of a company. If the company grows, the shareholder’s stock value grows. If the company decreases in value, so do individual stocks.
- Corporate bonds: Bonds are used to borrow money from the public. Investors purchase bonds and receive the interest accumulated on the bonds. Once the bond matures, investors can get back the principal paid on the bond.
Individual securities vs. exchange traded funds
You should choose individual securities over ETFs if:
- You want to invest in an asset with the potential (not guarantee) of high returns (despite high risk) as ETFs offer a weighted average of all stocks included.
- You want to earn dividends — payments a company makes to its shareholders to share the profits.
You should choose ETFs over individual securities if:
- You are looking for a low-risk investment as ETFs entail a basket of securities, some of which may perform well even if others perform poorly.
- You are investing for the long term as the growth of some stocks cancel out the low performance of others, eliminating the risk of total loss. In fact, the average return rate for the S&P 500 index (an ETF) for most of the past century has been about 10% per year.