Investing in ETFs: Exchange Traded Funds

A popular way to invest in the market today is through what’s called ETF’s, or Exchange Traded funds. They work much the same as regular stocks; they are portfolios of stocks, bonds, or other investments that trade on the stock exchange. All ETF’s are an index fund, which means that they track the performance of a specific category of stock. Everything from all of the US stocks to markets overseas. If you’ve been thinking about investing through other countries, the ETF’s are thorough in their research and you should talk to your broker. You may also invest in ETF’s that mirror the US bond market, as well as invest in gold, oil, and even pork bellies.

The combination of low-cost and the diversity of these funds, tax efficiency and the flexible investing in stocks, ETF’s can give private investors a better sense of control over their portfolios, and the possibility of better overall performance.

However, like all stock options, not every kind is best for every investor, and there are potential risks involved. Here are the pros and cons of ETF’s:

They are flexible. Because they are listed on the exchange, you can sell and buy them at whatever price they are trading for that day, right on the floor, just like stocks. You can also buy them on the margin. They also have low operating costs, well below traditional mutual funds. They are also tax efficient, because you are usually buying and selling them to another ETF investor. There are no taxable gains to be passed on.

The greatest disadvantage to the ETF’s is that you must purchase them through a broker, and pay that broker’s commission. Even with the online brokers of the 21st century and their low online fees, you can lose a lot in broker fees, especially if you are making small investments. You’ll have to pay a commission every time you buy, and every time you sell, so at 10%, your investment needs to go up 20% to recoup the fees.

Because of this, ETF’s are better suited for heavy players–people who invest large sums for an extended period of time. If you invest modestly or occasionally, stick with basic mutual funds. They are also a little too flexible. The ease of trading in and out of ETF’s could lead to a decision to trade over different sectors of the market that could mean that you lose a lot of money, and you’ll have to pay transaction costs whether you make or lose money.


Information is for educational  purposes only and is not be interpreted as financial advice. This does not represent a recommendation to buy, sell, or hold any security. Consult your financial advisor.

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