What Are Advantages of ETF Trading in Terms of Asset Allocation and stock-like features

According to Investopedia, by trading an ETF, traders get the diversification of an index fund as well as the ability to sell short, buy shares on margin, and are allowed to purchase as little as one share. Another advantage is that the expense ratios for most ETFs are very low. There are over 1,000 different kinds of ETFs available. 

ETFs are used to track indices of broad-based US (Dow Jones, S&P, NASDAQ), international, country-specified (Japan, Australia, U.K. etc.), regional (Europe, Pacific Rim, emerging markets, etc.), industry (technology, energy, biotech, etc.), sector-specific (utilities, transportation, finance, etc.), bond, commodity, and market niches (REITs, gold, oil, etc.).

Studies have illustrated that asset allocation and diversification is a key factor responsible for investment returns, and ETFs are an excellent means for investors to build a portfolio that meets specific asset allocation needs. For example, an investor seeking an allocation of 75% stocks and 25% bonds can easily realize that portfolio with ETFs. That investor can even continue to diversify by dividing the stock portion into large-cap growth and small-cap value stocks, and the bond portion into bonds with different maturity dates.

ETFs are traded like stocks, in terms of real time span and continuous price changes during a trading day. You even can trade them at extended hours. ETFs possess characteristics similar to stocks. Thus, investors are allowed to trade on margin to magnify income, and sell short to hedge or protect your portfolio as well. Traditional mutual funds take orders during Wall Street Trading hours, but the transactions actually occur at the close of the market at 4:00 pm EST. The selling price is the sum of the closing day prices of all the stocks contained in the fund.  ETFs, by contrast, trade instantaneously all day long, and allow an investor to lock in a price for the underlying stocks or indexes immediately. 

When you trade ETFs, you only need to closely observe the macroeconomic environment, instead of each individual company’s PE ratio, management, profit margin, etc.  You do not need to do much fundamental analysis on individual companies. Thus, it can save your time and effort for researching. You can concentrate on the investment and trading.

More technical indicators are available for ETFs trading. For example, VIX, ISEE, TRIN, and Smart Money Flow Index, etc., are tracking the general market only. They are not available for individual Stocks.

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