There are myriad reasons why investors should choose exchange-traded funds (ETFs) over mutual funds. Factors such as much lower expense ratios (i.e. lower costs), greater tax efficiency, increased access to targeted markets and much more transparency are just some of the headline reasons why I recommend investors choose ETFs as their primary investment vehicles.
Yet one very important reason why I’ve come to really love ETFs, particularly during the past several years, is product innovation.
Now, most ETFs still are index-based, traditional funds that are pegged to particular market indexes such as the S&P 500 or the NASDAQ 100. Yet these funds, known as “vanilla funds,” are by no means the only types of ETFs out there. There are leveraged ETFs, actively managed funds, inverse funds, funds that track relative strength and even funds with an “ethical” focus.
These days, there’s an ETF for just about every flavor of investor, not just the ones who like the taste of vanilla.
One fund that I find a particularly interesting example of ETF innovation is the LocalShares Nashville Area ETF (NASH). Launched less than a year ago, NASH is designed to offer investors a targeted focus on companies headquartered in the boom town of Nashville, Tennessee. Some of the current holdings in NASH are LifePoint Hospitals (LPNT), HCA Holdings (HCA) and Dollar General (DG).
This city-focused fund is one great example of how diverse ETFs have become of late. The fund’s outstanding gain of nearly 12% since inception also demonstrates how well an extremely targeted ETF can perform.
The bottom line here is that when it comes to innovation, all of the action seems to be in the ETF corner. Mutual funds just aren’t doing the kinds of things ETFs are doing right now, and that’s another reason why investors should choose ETFs.