One of the most popular investment avenues today, an Exchange Traded Fund (or ETF) is a collection of securities that functions by tracking an underlying index, e.g. NASDAQ or SPY 500. Furthermore, ETFs are marketable commodities. This means that they can be bought and sold based on their associated prices.
The reason why ETFs are named so is because they can be traded on the stock market, the same way stocks are traded. ETF share prices change multiple times during a trading day.
ETFs suits not only novice investors looking to start their investment journey, but also seasoned investors who want to meet certain goals. Here are a few reasons why you should definitely invest in ETFs:
- They offer access to multiple stocks across varying industries, which means that investors looking to diversify their portfolios can do so from the get go by investing in the right ETFs.
- They are passively managed funds, which means that investors have to worry about fewer broker commissions and management fees.
- They typically have lower expense ratios than other investment products.
- They offer better risk management due to the fact that they offer a lot of diversity.
- They can be used to target specific industries as well.
Both, mutual funds and ETFs are based on pooled fund investment concepts, but that is where the similarities between the two end. There are many differences between the two types of investments, including:
- ETFs have a lower fee when compared to mutual funds, making them apt for young investors looking to grow their funds.
- ETFs trade throughout the day, which is why the prices tend to vary at different points of the day. Mutual funds, on the other hand, trade at the end of the day and have a fixed price throughout the day.
- ETFs are passively managed funds while mutual funds are actively managed. The fees of handling the latter can, therefore, keep piling up.
- Mutual funds have higher taxes associated with them, while ETFs typically have no capital gains tax.
The stock market is what an ETF is traded on. Many people often compare ETFs with stocks themselves, and while it’s true that they trade in the same way, they function very differently and offer their own sets of benefits to investors.
As ETFs track varying indexes, they offer exposure to multiple industries in one go. For investors to gain the same level of exposure through stocks, they would have to invest in multiple stocks, which can be frightfully expensive.
The most significant difference between the two is that a stock relates to a specific company and its performance while an ETF tracks a whole basket of commodities across various industries.