On the other hand, investors can also choose more targeted single funds that track individual countries, regions or markets. Moreover, people can customize portfolios further with ETFs that focus on asset categories, like large-, medium- or small-caps, and specific sectors, such as the tech or health care markets.
Moreover, bond index-based ETFs also divvy up the fixed-income markets in similar ways. However, bond ETFs may categorize markets by credit-quality and maturity.
Unlike traditional open-end mutual funds, index-based ETFs can be traded throughout the day on a brokerage account, similar to company stocks. Additionally, index ETFs are distinct from actively managed funds as index funds only passively mirror a benchmark, whereas active managers may pick and choose component holdings to beat the market. However, index funds have consistently outperformed the more costly active funds over the years. [Passive ETFs are Looking Even Better Next to Active Funds]
Investors who are interested in crafting an investment portfolio should consider a group of low-cost index-based funds. For instance, one can create a diversified portfolio with just a few investments, including a broad U.S. market index fund, international market fund and investment-grade bonds. [Build a Diversified Investment Portfolio with Just Three ETFs]
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.