Exchange traded funds (ETFs) offer the best of two worlds: equity and mutual fund investing. ETFs can do this because they trade on exchanges like equities, but are structured to mirror market indexes, thereby relieving you of active management, at least in regard to a particular investment.
- ETFs are a variant of index funds in that they are usually passive vehicles that represent a basket of stocks that mirror an index. The difference is that unlike an index fund, an ETF trades on a stock exchange in real time, reports The Economic Times.
- Advantage 1: many mutual funds have investment minimums and early redemption fees; with ETFs, there’s no such thing. [5 Trading Rules for ETF Investors.]
- Advantage 2: real-time tracking. Mutual funds only give one price at the end of the day. ETFs price all day long.
- Advantage 3: real-time trading. Mutual funds can only be bought and sold at the end of the day. ETFs can be bought and sold whenever the markets are open.
- Advantage 4: cost. Mutual funds aren’t cheap – the management behind them comes at a price. For the most part, ETFs are cheaper than the average mutual fund. [7 Factors in the Cost of ETF Ownership.]
- Advantage 5: transparency. Mutual funds are only required to disclose their holdings once per quarter. In an ETF, you always know what you own on any given day.
For more stories on ETFs, visit our ETF 101 category.
Sumin Kim 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.