By Kendall Bauer

Exchange-traded funds (ETFs) are among the most popular investment options for individuals seeking a balance between diversification, low cost and tax efficiency. Here are five key features of ETFs that might make them a good fit for your portfolio:

1. Low costs

Many ETFs have low expense ratios due to their passive investment approach, often tracking a single index. Recently, actively managed ETFs have also gained popularity, maintaining competitive expenses relative to mutual funds in part through a creation/redemption process that involves exchanging securities rather than cash. The process can offer investors greater tax efficiency and flexibility as they diversify their holdings.

Learn more
Investing in ETFs, a Money Talk Video with Dave Sandstrom
Exchange-Traded Funds (ETFs), from Investor.gov
Mutual Fund vs ETF: What’s the Difference? from the Financial Industry Regulatory Authority

2. Diversification

ETFs offer exposure to a wide range of markets, sectors and niche investment strategies in a single product. Investors can access various asset classes, such as stocks, bonds, Treasurys and commodities, all through ETFs. The vast number of choices and strategies allow investors to have multiple options when constructing their portfolio

3. Liquidity

Unlike mutual funds, which settle at an end-of-day price, ETFs trade on stock exchanges throughout the day, just like individual stocks. Intraday trading allows investors to buy or sell ETFs at current market prices during trading hours, offering greater flexibility and control.

4. Tax efficiency

ETFs are structured so that they rarely distribute capital gains. That makes them a tax-efficient option, particularly in non-retirement accounts. Compared to other investment vehicles, ETFs minimize taxable events.

5. Transparency

Most ETFs disclose their holdings daily, enabling investors to see exactly what they own inside the fund at any given time. Such transparency exceeds that of mutual funds, which typically report their holdings only on a quarterly basis.

ETFs offer a wide array of benefits to investors seeking diversification, low costs and tax flexibility, including some advantages not covered above. Investors can consider ETFs in both long-term and short-term strategies.

With the recent rise in popularity of actively managed ETFs and expansion of options due to growing demand, it may be worth discussing with your advisor whether ETFs would be a good addition to your portfolio. Alongside mutual funds, active ETFs can provide investors with more tools to manage risks effectively.

By incorporating both active and passive ETFs, investors can tailor their portfolios to align with their individual risk tolerance, time horizon and investment objectives – all while trying to keep costs low.

Kendall Bauer is a vice president and investment advisor at Landaas & Company, LLC.