From a broad perspective, investment advisors generally point to three basic ETF benefits:

1.      Tax Efficiency. 

Unlike stock mutual funds that pay out taxable gains distributions according to schedules that the fund’s shareholders do not control, ETFs generally do not pay those distributions. ETF shareholders control when and how they take capital gains by deciding when they will sell their ETF shares. With some ETFs, the tax advantages that investors realize from this control are offset by higher fund expenses. Again, as with all investment assets, the key to optimizing the tax efficiency benefits of ETFs is to utilize ETF investments within the structured context of a well-formed investment strategy

2.      Diversity

The growing number of ETFs gives investors the opportunity to invest in a broad swath of asset classes and market sectors. This diversification minimizes an investor’s exposure to factors that might have an adverse effect on some asset and sector classes over others. To optimize this ETF benefit, investors need to verify the assets that are included in the ETFs that they include in their portfolios. Different ETFs may invest in similar sectors or asset classes notwithstanding different descriptions of their investment strategies.

3.      Transparency

Actively-managed ETFs are legally required to disclose their holdings on a daily basis. By custom and convention, the greater majority of ETFs also publish a daily disclosure of their holdings. ETFs also trade in real time, and investors know the exact value of their ETF positions at all times during a trading day, rather than having to wait for an end-of-day settlement. These ETF features give investors an unprecedented opportunity to see exactly what assets and industry sectors they are investing in on a real-time basis. This transparency further helps investors to avoid unplanned risks and changes in investment strategies that may be more common with mutual fund investments.