One of the most obvious benefits is that ETFs are probably the most cost-effective way to expose your account to all those underlying securities held by the ETF in question. This is because a single share of an ETF can cost as little as $50, meaning that with that sum, you can hold a stake in the fortunes of all the individual names that compose the ETF. It would be impossible to purchase a fractional share in all those individual securities with the same amount.
Another benefit is the diversification offered by ETF investing. ETFs, especially ones that hold a mix of different asset classes, offer a kind of diversification that’s difficult to match. Rather than having your account exposed to the fortunes of a handful of securities that you’re trading individually, an ETF allows you to passively allocate capital to a large number at once.
Furthermore, when trading an ETF (or indeed an index), you only have a single trade to manage. For example, imagine having to open, manage, and close positions on 100 individual securities rather than allocating capital to an ETF that holds all 100 securities in its portfolio.
In addition, ETFs also distribute the dividends of the underlying securities held in the ETF portfolio proportionally to its investors, and there may also be some tax advantages to trading an ETF depending on your jurisdiction.
Finally, ETF investing is much more suited to beginners, due to the inherent diversification of the product. This is because the sheer number of assets in the ETF portfolio can balance out any drawdowns being experienced by individual stocks. Of course, this doesn’t mean that ETF investing doesn’t come without its risks.
A highly thematic ETF can undergo large drawdowns should that theme fall out of favour, or find itself in an unconducive macro environment. Cathie Wood’s Ark Invest ETF is a good example of this. In the post-pandemic bull market, it experienced extraordinary growth, however in the environment of monetary tightening that followed in 2022, Ark Invest’s holdings went from around $50 billion, to $16 billion.