The exchange traded fund structure offers many attractive benefits, but investors should still understand potential risks.
The ETF structure combines features of both open-end mutual funds and stocks. ETFs and mutual funds hold a basket of securities, but ETFs are bought and sold throughout the day on an exchange like a stock. [Three Reasons Why Investors Like ETFs]
Fees are lower in ETFs. No-load mutual funds bought from the issuer cost about 1.5%, according to KPLU. Moreover, mutual funds may charge sales loads and come with redemption fees. ETFs, on the other hand, charge 0.62% on average.
ETFs also provide daily disclosures into holdings, whereas mutual funds are less transparent, typically revealing holdings on a quarterly basis.
Nevertheless, investors should consider some potential risks when picking out an ETF. For instance, ETFs with exposure to small sectors or niche markets can be volatile.
Since ETFs are traded like stocks, commission fees add up if you are making regular deposits. Still, there are a number of commission-free ETF options available. [Six Popular Commission-Free ETF Trading Platforms]
Due to the readily tradeable nature of ETFs, investors may be tempted to day-trade the investment. Every investor, though, should implement some kind of self discipline. For example, we follow the 200-day exponential moving average as an indicator for when it’s time to go in and when it’s time to sell.
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.