Exchange Traded Funds or ETFs became available in 1993 and are index funds traded on the stock market. Index funds are a portfolio of stocks that usually duplicate the performance of a stock exchange such as S&P 500 or Dow Jones Industrial Average.
ETFs hold assets of stocks and bonds usually at the same price as the net asset value or fund assets minus liabilities of its primary assets over the course of the trading day. ETFs are another way to invest and have the features of a mutual fund. ETFs track indexes and provide more investing options than a mutual fund.
Anyone can buy ETFs. ETFs allow investors to diversify in U.S. and global stocks. Investors can use ETFs as a short-term investing strategy. ETFs allow investors to keep their assets invested instead of being inactive.
ETFs can be purchased or redeemed at the end of each trading day for its net asset value. Net asset value is used to designate price per share. Investors can buy and sell ETF shares throughout the day like stocks.
ETFs do not sell or redeem their individual shares at the net asset value. An ETF pays dividends or distribution of earnings received on a quarterly basis usually in your brokerage account. To reinvest the cash you have to make another purchase.
ETF's have low costs and tax benefits. ETFs generate fewer capital gains or profit due to the low turnover of the securities such as stocks, mutual funds, bonds, CDs, notes, etc. Fees for ETFs are clearly identified and are usually low.
Individual investors who purchase ETFs must pay a brokerage commission to purchase and sell ETF shares. This is a disadvantage for investors who trade frequently. Contact a financial advisor to be sure this is the right investment option for you.
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