What Are ETFs?
The exchange-traded mutual fund around since the early 1990s. They combine index investing with the lower costs and liquidity of individual stock ownership. But are ETFs a good match for your portfolio?
What exactly is an ETF?
Exchange-traded refers to shares that trade all day on major stock market exchanges. Funds are investing vehicles that have many thousands of companies under one umbrella, typically with an investing theme, like technology stocks.
There are ETFs to represent virtually any segment of the market. Therefore, if you are about to dive into ETFs look examine your portfolio and see where you can get more diversification.
If you want some indexing in your portfolio and want to invest a lump some, ETFs provide some flexibility you might find useful. Unlike mutual funds, ETFs can be bought or sold anytime the market is open via your brokerage account.
ETFs are not a good choice if plan to dollar-cost average, because of the trading costs. A mutual fund would be more appropriate in this circumstance.
- Taxes: The big buzz about ETFs is their tax efficiency. The big “tax event” for ETF shareholders happens when you sell your shares, hopefully at a profit, after which you’ll pay capital gains taxes.
- Expense ratios: By construction, ETF investors have less exposure to capital gains taxes than mutual fund shareholders. Mutual funds can have high turnover rates and that can cost you a lot of money. ETFs do trade, but much less than most mutual funds. Annual expenses for ETFs range between 0.1% and 0.65% and are deducted from dividends. Index mutual funds charge anywhere from 0.1% to more than 3%.
- Minimum investment requirement: Mutual funds often ask for a chunck of change to start an account. With an ETF, as long as you have the money to buy one share and can pay the transaction fee you are good to go.
- Ease of use: Very liquid and easy to trade.
Do your homework and know what you are investing in. So make sure the ETF label matches the underlying securities you want to buy.
Written by Nagel on March 27th, 2007 with
no comments.
Read more articles on Investing.
- [+] Digg: Feature this article
- [+] Del.icio.us: Bookmark this article
- [+] Furl: Bookmark this article