What is an Exchange Traded Fund?
Exchange traded funds, or "ETFs," are investment vehicles that pool money from individual investors to invest in stocks, bonds, and other securities. They are similar to mutual funds, except that ETFs are traded between individual investors over a stock exchange rather than being purchased directly from a fund company like a mutual fund.
What are the benefits of investing using ETFs rather than mutual funds?
Tax Efficiency: ETFs tend to be more tax-efficient than mutual funds because of how they are created and traded.
Low Expenses: ETFs tend to have much lower ongoing expenses (expense ratios) than mutual funds.
Transparency: Since most ETFs follow an index, it's easy to find out exactly what you have in your portfolio at any given time.
Intraday Trading: ETFs can be bought and sold all day rather than at the end of the trading day like mutual funds.
Are there any downsides to using ETFs?
Commissions: You'll pay commissions to buy and sell ETFs, since they are traded on exchanges. This can increase your cost and can make them impractical if you make frequent investments in small dollar amounts.
Bid-Ask Spreads: If an ETF has low trading volume, the price you pay to purchase it, or the "ask" price, might be much higher than the price you'd receive when selling, or the "bid" price; and this can hurt your returns.
Discounts/Premiums: Since the price of an ETF is based on market forces, the price you pay might be at a slight discount or premium to the actual value of the underlying portfolio.
Remember that these topics are general in nature, so consult with your financial advisor about your specific situation before making any investment decisions.