Exchange-Trade-Funds (ETFs)

An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like feature. An ETF can be bought and sold as a single security. Just about anything that can be done with shares of common stock can be duplicated with an ETF. Unlike a mutual fund, ETFs can be traded intraday, shorted and placed with stop or limit orders. Many funds offer options.

ETFs, including funds devoted to domestic and foreign stocks, have grown to about $488.8 billion since the first fund started trading on the American Stock Exchange in 1993. Mutual funds represent about $11.3 trillion, the Investment Company Institute reports. No one expects ETFs to slug it out with mutual funds for the affections and assets of individual investors. But if you’re a long-term investor, ETFs offer distinct advantages, including low management fees and generally low exposure to capital gains. An ETF’s diversification reduces risk without incurring upfront sales loads or redemption fees common to many mutual funds. ETFs enable investors to track just about any sector, including financial services, real estate, healthcare, technology, telecommunications, natural resources, utilities, semiconductors, software, biotech and manufacturing. Other funds track S&P indexes, the Russell 2000 and international equity indexes. The Nasdaq 100 Trust tracks the index and offers broad exposure to the technology sector.

Like any other investment, do your homework and seek the help of a professional.