Exchange Traded Funds (ETF) are ideal for investors seeking diversification with their investments. An ETF allows investors to own a basket of individual securities consisting of hundreds of domestic or international stocks and bonds.
What are Electronic Traded Funds (ETFs) and How To Invest In Them
Exchange Traded Funds (ETF) are ideal for investors seeking diversification with their investments. An ETF allows small investors to own a basket of individual securities consisting of hundreds of domestic or international stocks and bonds.
ETFs have ticker symbols and they are traded on exchanges. You can buy and sell ETFs through a brokerage firm such as Fidelity.
The price of an exchange traded fund changes throughout the trading day. The ETF price is based on supply and demand.
Most ETFs are designed to track a particular index such as the S&P 500. However, there are some ETFs that are actively managed which are designed to beat a specific index.
Another type of ETF is a sector ETF which is designed towards a particular industry such as pharmaceutical or technology.
There are no sales loads to buy an ETF however you do have to pay a brokerage commission.
Even though you may have lower management fees and pay less in taxes, the trading commissions may be more than what you can save when buying ETFs on a regular basis.
Investing in no-load mutual funds may be a better option than investing in ETFs when investing small amounts of money on a regular basis, such as monthly, because of ETF trading commissions.
ETFs give you the flexibility to invest any way you want. For example, you can structure your asset allocation to something like this – 75% stocks, 20% bonds, 5% money market, by buying ETFs in both stocks and bonds.
Change the ETFs asset allocation mix any time you want to better suit your risk tolerance and goals.
You can have exposure to any market in the world or any industry sector by owning ETFs in those specific sectors such as gold or emerging markets.
ETFs have low minimum investment requirements. The minimum investment when investing in an ETF is whatever the ETF is priced at when you buy. For example, if the ETF is trading at $47, that is your minimum investment for that particular exchange traded fund.
Diversification and less time conducting research are some of the advantages to buying ETFs. You are buying a collection of stocks or bonds and these securities are professionally managed for you.
Lower costs and tax efficiency are two additional advantages to buying ETFs. Most ETF portfolios are passively managed so they will not generate as much in capital gains as actively managed mutual funds.
Plus, as already mentioned, ETFs have an advantage over mutual funds because they are traded throughout the trading like a stock.
ETFs have a settlement date of two days after you sell. Mutual funds only have a one day settlement date. The settlement date is the date you get your cash after you sell a mutual fund or exchange traded fund.
Because of the two day settlement date for an exchange traded fund you can not sell an ETF and buy a mutual fund on the same day.
Learn more about investing in mutual funds.
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