Exchange Traded Funds — An ETF is described as a cross between a stock and an index mutual fund. ETFs are investment products that hold a pool of securities and are designed to generally correspond with a specific index. Investors can buy and sell ETFs just like a stock, through their broker, throughout the trading day. Last year alone investors pumped more than $54 billion into ETFs.

Here is the Securities and Exchange Commission definition: “An Exchange Traded Fund, or ETF, is a type of investment company whose investment objective is to achieve the same return as a particular market index. An ETF is similar to an index fund in that it will primarily invest in the securities of companies that are included in a selected market index. An ETF will invest in either all of the securities or a representative sample of the securities included in the index. For example, one type of ETF, known as Spiders or SPDRS, invests in all of the stocks contained in the S&P 500 Composite Stock Price Index.”

There are ETFs to represent virtually any segment of the market — both here and abroad. There are ones tracking everything from bonds, REITs and the utility sector. Large mutual funds such as Fidelity and Vanguard also can provide ETFs.

ETFs generally have lower expenses than traditional mutual funds, even index funds, and may have some tax efficiencies at the fund level. If you have longer time horizons and larger, lump-sum amounts, you may want to consider ETFs over index funds if you are investing in a taxable account.

ETFs tend to generate fewer capital gains than mutual funds due to the low turnover of the securities that comprise them, and because they are not required to sell securities to meet investor cash redemptions. Keep in mind, however, that you will generate taxable capital gains/losses if you sell the ETF shares.

ETFs are economical to buy and especially to maintain over the long-run, making them especially attractive for the typical buy-and-hold investor. Annual fees are as low as .09 percent of assets, which is breathtakingly low compared to the average mutual fund fees of 1.4 percent. Although investors must pay a brokerage transaction to purchase them, with brokers, Fidelity, Vanguard and others, this becomes negligible with sizable trades.

If you are looking for a low-cost alternative to mutual funds and you are willing to do a little research, ETFs might be just what you are looking for.

~ Frank Betts
Retired

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