Exchange-traded funds (ETFs) are investment funds available having qualities that are unique and set them apart from other vehicles. ETFs are securities that attempt to track a specific index or all types of indexes, industries, or commodities. They contain stocks, bonds, commodities and various other combinations of investment types.
ETFs were created in the 1990s whose aim was to mimic the movements of an index of a specific financial benchmark. But today they also track industries and commodities, not just indexes. Investment vehicle with the sole purpose of mirroring a specific index is called an index fund (An index fund is a mutual fund built to match the stocks of a market index such as the S&P 500. Index fund’s portfolio is the same of the index it tracks).
There are various types of ETFs having different purposes such as price increases, speculation, income generation, etc. Some of the ETFs are Bond ETFs, Industry ETFs, and Currency ETFs along with others.
Some investors prefer ETFs because they are combination of diversification of a mutual fund with the flexibility of stocks. Unlike mutual funds, ETFs do not have their net asset values calculated each day, but rather their prices may fluctuate throughout the day. Being similar to mutual fund shares on one side, they’re traded on stock exchanges like any other ordinary stock but the fund’s underlying assets’ worth is not affected by market trading.
Exchange-traded funds may have expense ratios (also called “Management Expense Ratio (MER), it measures how much of total assets in fund to be used for administrative expenses”) that are lower than those of an average mutual fund, and they are usually more tax-efficient and more liquid than most mutual funds. Additionally, shareholders can often invest as little or as much as they desire, resulting in average lower cost for investor as compared to the situation where investor buys one stock of each specific index’s companies. An ETF can be sold only on the stock market but cannot be redeemed by a shareholder.
A downside to ETFs is the commission fee as they’re traded like stocks, which is generally not the case with a mutual fund. Actively managed ETFs have higher fees. But fewer broker commissions are charged because much fewer transactions are involved as compared to stocks’ trading. On other hand, an ETF can be a diversified and low-cost investment that often has a low turnover rate, so you might want to consider ETFs as part of your investment portfolio.
Remember that diversification is a way to manage investment risk; it does not guarantee a profit or protect against investment loss.
The principal value and rate of return on ETF and mutual fund shares varies subject to market fluctuations. Shares may be worth more or less than the original cost, when sold or redeemed.
Exchange-traded funds and mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the ¬purpose of ¬avoiding any ¬federal tax penalties. You are encouraged to seek advice from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the ¬purchase or sale of any security.
IMPORTANT DISCLOSURES
Gerald R. Dewes does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.