Since exchange-traded funds (ETFs) were first introduced in 1993, interest in them has grown steadily. In one year alone, ETF assets increased by a staggering 49% to reach $588.2 billion.
Although ETFs resemble index mutual funds, they actually have a lot in common with individual shares of stock. ETFs can be purchased on margin, sold short, and traded any time the markets are open. If you are seeking an investment that can offer the benefits of both mutual funds and stocks, an ETF may be an option to consider.
An ETF is a passively managed portfolio of securities that is initially sold by an investment company and thereafter traded in individual shares on a stock exchange. The underlying securities may all be from a certain sector or country, or they may track a broad market index.
Taking Stock
ETF share prices are more likely to be based on the demand for the shares themselves than on the net asset value (NAV) of the underlying securities. However, the performance of the underlying securities can influence the share price, as can other variables that may cause the shares to trade at more or less than the value of the underlying securities.
Unlike mutual funds, which calculate their NAVs once a day, ETF prices can fluctuate throughout each trading day. The value of ETF shares, stocks, and mutual funds fluctuates with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
Because they are passively managed, ETFs tend to charge lower annual expenses than mutual funds. However, most investors must pay a commission to trade ETF shares because they cannot buy them directly from the issuing company.
Mutually Assured Diversification
Like mutual funds, ETFs generally offer an easy path to diversification. There are hundreds of ETFs available, with funds covering almost every imaginable major index, sector, international market, and industry. With all these options, it is simply a matter of finding an appropriate ETF.
Keep in mind that diversification does not guarantee against loss; it is a method used to help manage investment risk.
Exchange-traded funds and mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
By combining elements of both stock and mutual fund investing, ETFs offer an exciting investment opportunity.
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