ETFs have grown in popularity in recent years and this is in large part thanks to them being a low cost form of investing. Compared with investment vehicles like mutual funds, ETFs offer a cost-efficient alternative that comes with its own set of benefits.
So why are ETFs so cheap? Here, we’ll examine why ETFs are affordable and why investors might want to consider them as part of their portfolio.
Interested in using ETFs as a cost-efficient diversification strategy? Take a look at our wide range of ETFs and the helpful tools we’ve created to make investing easier than ever.
What makes ETFs so cheap?
The strength of ETFs lies in their passive management structure. Where some vehicles like mutual funds are predominantly actively managed, ETFs are built to replicate the performance of a particular index or industry, meaning they can be set up and largely left to run unmanaged.
Immediately, this reduces the costs associated with ETF investing. Without the need for active involvement from a fund manager, ETFs can be sold without the fees ordinarily associated with these kinds of investments.
Also, without getting too technical, ETFs are also exempt from other fees ordinarily associated with mutual funds. These include 12b-1 fees – not all mutual funds have these but they’re important to look out for.
At InvestEngine, for example, we’re able to charge no ISA or account charges, no commission and no buying or selling fees on our DIY ETF range. This means that our investors pay only the relatively small underlying ETF fees when investing – building a diversified investment portfolio has never been so accessible.
Mutual funds have made efforts to lower their fees over the last few years but even passive mutual funds remain more expensive than ETFs, generally speaking. This is one of the primary reasons that ETFs have exploded in popularity as more and more people turn to long-term, diversified investment strategies to protect and grow their wealth over time.
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