The easiest way to understand exchange traded funds (ETFs) is to think of them as a combination of mutual funds and stocks. While these can be traded like stocks, they also offer the same diversity available to investors in mutual funds. Although relatively new, having been introduced in the 1990s, the flexibility and the affordability of ETFs are now enticing more people to invest in these funds. The follow is some basic information about ETF investing.

Basics of ETF investing

Both individuals and institutions can get involved in ETFs. This can be done in basically the same way stock investing is carried out. With an online broker or offline broker, ETFs can be bought and sold like any stock. The amount of research and control required depends on the personal preferences of the investor, and the type of broker chosen.

An ETF is a basket of stocks designed to track an index or market. There are ETFs that track everything from the S&P 500 to commodities. Their prices will basically mirror the price of the market they are based on, although they may trail or exceed it at times. Designed only to follow, they require relatively little active human management, and therefore have much lower administration fees than most mutual funds.

Those who invest in ETFs are not trying to beat the market. They are only trying to capture the average returns that the markets have historically offered over time. Since many stock market investors and mutual funds usually do not beat the market anyway, they can be a smart choice.

Benefits of ETF investing

There are several benefits that you can get should get involved in ETF investing. These include:

– Diversity: As mentioned earlier, ETF investing offers diversity to investors. A typical ETF is essentially a combination of stocks in different companies. To make the most out of an investment, it is possible to use ETFs to shadow various financial instruments such as bonds or commodities.

– Minimal costs: ETF investing has lower costs compared to mutual funds, particularly when ETFs are purchased less frequently but in larger amounts. Furthermore, ETFs also offer more control over taxes when compared to mutual funds, since the latter is subject to higher turnover internally. Generally, ETFs do not generate significant capital gains until they are sold by the investor.

– No investment minimums: Not only do ETFs have minimal costs, they also don\’t require investment minimums, and you can even be purchased in one-share increments. This isn\’t the case with mutual funds, which generally require a minimum of $1,000 or more for the initial investment.

– Ease in transaction: Investors are limited to selling or purchasing mutual funds at the closing price every day. This isn\’t the case with ETFs, since you can trade these whenever you wish to, similar to how stocks work. There are even day traders and short-term traders who use ETFs in their portfolios.

– Transparency: Those who are involved in ETF investing know exactly where their funds and assets invested in ETFs are going. This isn\’t the case with mutual funds, which are a lot more opaque that most people think.

While ETFs have a lot of advantages, they are not for everyone. Those who want their investments more actively managed for them will want to go with mutual funds. In addition, those who would like to beat the markets certainly need another investment. However, for everyone else, they are an option that should be considered.

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