Exchange traded funds are favored by investors for their convenience, simplicity and low cost. These funds serve both novice investors and seasoned traders due to their flexibility and ease of use.

“There have been a lot of investors turning to ETFs,” Michael Iachini, managing director of ETF research at Charles Schwab Investment Advisory said. “ETFs do offer some nice benefits.” [An ETF Trend Following Plan for All Seasons]

Exchange traded funds are baskets of stocks, similar to the concept of a mutual fund, but it trades with the ease of a single stock, at any time of day. Buying and selling shares of ETFs are easy through a stockbroker or even easier through an individual brokerage account.

“ETFs are basically index mutual funds that trade like stocks,” Iachini said on The Bulletin. “When you buy an ETF, you own a single security that represents a basket of other securities, generally tracks an index and fluctuates with the value of the underlying assets.”

As of February 2012, the ETF industry had about $1.2 trillion in assets under management, according to Morningstar research. This number proves that investors are realizing the benefits of ETFs as time goes on. Pamela Yip for The Bulletin reports that there are certain points investors should consider before investing in an ETF.

  • Low Expense Ratios: In comparison to mutual funds, ETFs have lower expense ratios. Expense ratios are the amount of a funds assets that the manager takes each year to cover operating costs. These are lower for ETF because they are not actively managed in the same way a mutual fund is. [ETFs VS. Active Managers]
  • Know what your ETF holds: As you are conducting your research, be sure to figure out which index the ETF fund tracks, what the fund’s largest holdings are, and what the fund’s expense ratio is. Furthermore, you should consider the fund’s dividend yield, which measures how much income it generates from both dividends and assets. Investors can gain exposure to certain industries, commodities, currencies or countries through ETFs. [ETFs: Don’t Judge a Book by Its Cover]
  • Flexibility: The ease of the trade is a huge plus for ETFs. In contrast to a mutual fund, that can trade at the end of the day, an ETF is nimble and can trade as swift as a single stock. This ease of use makes these funds attractive to traders and long term investors.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.