Category: Exchange-Traded Funds

QUESTION:

I’m fairly new to investing and am thinking of branching out from mutual funds. What can you tell me about exchange-traded funds?

ANSWER:

Simply put, an exchange-traded fund (EFT) is a basket or bundle of individual securities that track an index, sector, commodity, or other assets. Unlike their “cousin” mutual funds, EFTs are marketed on a stock exchange like stocks. They may contain a single investment type or be a mixture, including stocks, commodities, bonds, or currency. Some ETFs offer U.S.- only holdings, while other may include international securities. ETFs have low expense ratios and are generally less costly than buying the stocks individually.

An exchange-traded fund (ETF) can add diversity to your investment portfolio.

STOCK BUNDLES

An ETF is created to track the value of an underlying asset (like gold) or index (like the S&P 500). It purchases and bundles together the appropriate stocks, bonds, commodities or currencies and then sells shares of this package to investors.

NOT A MUTUAL FUND

Unlike mutual funds, which are bought and sold at the end of the day, ETFs can be traded throughout the day. And while actively managed mutual funds can see more turnover of the underlying assets, creating capital gains, ETFs are generally passively managed. They don’t incur much buying and selling. Also, ETFs usually have lower fees than mutual funds and lower investment minimums.

ETFs VERSUS STOCKS

When you buy stock, you’re investing in one company. But with an ETF, you’re investing in a basket of securities providing greater diversification. And because ETFs are professionally managed, you can spend less time researching and selecting individual investments.

Consult your financial professional to discuss whether ETFs are suitable for your portfolio.