Exchange traded funds, also known as ETFs,
are an increasingly popular investment security
that any investor from beginners to
experts can add to their portfolio.
ETFs are funds that pool together the money of
many investors to invest in a basket of
securities. ETFs often track an underlying index
like the S&P 500, a particular industry
like biotech, or a collection of other
related assets like currencies or commodities.
From the outside, ETFs and
mutual funds look similar.
Both of these types of securities are
professionally managed basket-like funds that hold
a number of underlying assets.
However, several important characteristics set these
two types of funds apart.
For instance, ETFs are typically passively managed
because they track indexes and mutual
funds are typically actively managed.
This means the fees and expenses associated with
mutual funds can be higher, and mutual
funds often have investment minimums,
which ETFs do not.
Unlike mutual funds, ETFs actually
trade much like stocks.
Like the name implies, ETFs are traded
on an exchange throughout the day.
Based on supply and demand, the price of an
ETF can fluctuate above or below its net asset
value during the day, meaning you may
purchase it at a premium or discount.
Mutual funds are only traded once per day and
are priced based on their net asset value
at market close.
Hundreds of ETFs exist for all types
of asset classes, industries and more.
Let's take a look at some of
the most popular types of ETFs.
Stock ETFs.
These track a particular set of equities that
are often related by index or industry.
For example, an ETF that tracks the Nasdaq 100
will be comprised of all the securities on
the Nasdaq 100 index.
Bond ETFs.
As you might guess, these
invest exclusively in bonds.
Either government or corporate.
Bond ETFs can be a more liquid investment
than individual bonds because they will trade on
an exchange throughout the day and these investments
can be a valuable addition to a
fixed income portfolio as they
typically pay monthly dividends.
However, not all ETFs pay monthly dividends,
and it's possible that dividends will
fluctuate or be eliminated over time.
Sector ETFs.
When you invest in a sector ETF, all the
securities within the fund will relate to a
particular industry.
You may also consider ETFs that invest
in the commodities and currency markets, which
connect is more accessible entrance points
to these kinds of markets.
ETFs can facilitate exposure to securities
you might not otherwise invest in.
That's because one fund can
hold many underlying securities.
So when investing in an ETF, you only need
to make one purchase to be exposed to the
potential benefits of all the assets within.
Of course, investing in an ETF also exposes
you to the potential risks of its underlying
assets. And since most ETFs are passively managed,
they can have lower expense ratios, or
fees, you have to pay as
an investor than mutual funds.
Another way ETFs are a cost efficient
investment, they don't have investment minimums,
and most brokers like Ally Invest offer
hundreds of commission free ETFs, meaning there's
no added cost when buying or selling them.
Of course, like any investment, investing in
ETFs carry an inherent level of risk.
Be sure to do your research and familiarize
yourself with the securities held within an
ETF before you invest.
Interested in ETFs?
Here's what you need to remember.
ETFs are basket like investments that can
hold many underlying securities like stocks or
bonds. ETFs are not the same as mutual funds.
ETFs are traded throughout the
day on an exchange.
ETFs are usually passively managed and
can have relatively low expense ratios.
ETFs are a tool for
building diversification in a portfolio.
ETFs are not risk free.
