With more and more investors looking at exchange traded funds to meet their portfolio needs, it is important to take the time to thoroughly understand how the investment vehicle works.
According to ETFGI data, there are 5,632 exchange traded products on 63 different exchanges in 51 countries, with almost $3 trillion in assets under management, writes John Authers for Financial Times.
Getting into the investments, most see the majority of ETFs as a type of passive index fund. However, unlike traditional open-end mutual funds, ETF fees are comparatively cheaper, they may be accessed throughout the trading day on an exchange like a normal stock security, and offer tax advantages – some of the selling points that make ETFs so popular among new investors. [What an All-ETF Portfolio Does for You]
Since the ETFs are priced throughout the day, active traders can weave in and out of major market segments with ETFs. Additionally, authorized participants or market makers help create or redeem ETF shares to keep an ETF’s price from diverging away from the underlying net asset value – ETFs track a basket of securities and are priced to reflect changes in the underlying holdings. [A Look at the Cogs and Gears Behind ETF Trades]
Although, some ETFs may have a harder time tracking their underlying assets. For example, ETFs that track foreign markets, which are opened during different times of the day relative to the U.S. timezone, will see greater divergences between the NAV and an ETF’s price.