In the 1990’s a new investment avenue was created, the Exchange-traded fund.
Today, they are one of the most popular investment vehicles and are one of the basic components of a diversified portfolio.
While they have some similarities to mutual funds, there are many unique advantages to investing in an ETF.
“ETFs are a collection of stocks, commodities, bonds, or a blend of different types of investments,” Reeves says.
“This is what gives you the instant diversification piece. Exchange-traded funds track indexes, commodities, sectors, or other assets.”
A key differential characteristic of the ETF is that it is openly traded, and prices fluctuate throughout the day.
The collection of stocks or bonds in the ETF are passively managed, meaning that they are not involved with any managers overseeing the fund as an ETFs purpose is to closely mirror the performance of the index that they track versus the mutual fund that attempts to outperform the benchmark.
“Exchange-traded funds hold the advantages that mutual funds do but does not share their disadvantages,” Reeves says.
“ETFs do not charge a load and are therefore less expensive than mutual funds. They are more accessible to different ranges of wealth as there is no minimum capital, but instead the cost of one share. You know exactly what you own with an Exchange-traded fund. From a management, flexibility, tax, and fee position, this type of investment is more advantageous than the mutual fund.”
Exchange-traded funds are an investment type that are known for their ability to diversify a portfolio but also include many other beneficial characteristics.
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