What is an Exchange-Traded Fund (ETF)?
Exchange-traded funds, or ETFs, are investment vehicles that combine many of the popular features of both mutual funds and stocks. Like a mutual fund, an ETF is a basket of securities. Like a stock, investors can buy and sell an ETF throughout the day, as long as the market is open. While some ETFs are actively managed, most are passively managed. The aim of a passive ETF is to track the performance of its specified underlying index, less fees.
CHARACTERISTICS OF ETFs:
Select indices may be structurally-biased toward the most indebted issuers
ETFs are generally offered at a lower cost compared to other investment vehicles. Furthermore, passive ETFs are generally less expensive than their active counterparts, which allows investors to keep more of what they potentially earn.
ETFs are often more tax efficient than other investment wrappers because they experience lower turnover levels due to the fact they are traded on an exchange. Additionally, an ETF’s distinct structure incorporating “in-kind” transfers during the creation and redemption of ETF shares also helps minimize taxable events effecting shareholders.
Know what you own. ETF holdings are publicly disclosed, often on a daily basis.
ETFs provide a simple way to potentially increase overall portfolio diversification by investing in a basket of securities with a single trade. ETFs can offer tactical exposure to a specific sector, industry, commodity and/or geographic area or act as a core holding in your portfolio providing access to a broad asset class.
ETFs trade on an exchange, which provides the flexibility to buy and/or sell during normal hours throughout the trading day. ETFs are accessible to many investors, with a low minimum typically equal to the cost of a single share, which can vary throughout the day.