Five Things to Know About ETFs

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The use of exchange traded funds (ETFs) has increased rapidly in recent years. If you're just getting started with ETFs, here are a few basics to help get you oriented on these convenient, low-cost, flexible funds.

One: ETFs and mutual funds are similar in many ways, with several key differences.

Like mutual funds, ETFs are bundles of securities, such as stocks or bonds. Both ETFs and mutual funds make it easy to gain exposures to a wide range of markets.

A key difference between ETFs and mutual funds is how they are bought and sold. Mutual funds are traded directly with the fund company and shares are priced once a day, after the market close (4 p.m. Eastern). ETF shares, on the other hand, can be bought and sold throughout the day at market price when the market is open, just like a stock.1

Two: They have been around for a long time.

ETFs have been widely covered in the media over the past few years, but they are not new. U.S. stock ETFs have been around for more than two decades, and the first bond ETF was introduced in 2002. Today, ETFs have grown more than $3 trillion worldwide,2 as all types of investors turn to them to meet a wide variety of financial goals.

Three: ETFs are cheaper to own than the typical mutual fund.

Costs have a direct impact on your bottom line. Many investors are drawn to ETFs because they're generally cheaper to own.3 Those savings can really add up year after year. Also, if taxes are a concern, many ETFs have historically had lower taxable capital gains distributions than mutual funds.4 The result? ETFs may help you keep more of what you earn.

Four: ETFs come in virtually any "flavor" you can think of.

You can choose from more than 1,800 ETFs5 in the U.S. alone. ETFs are designed to help with a wide range of investment goals, including:

Core building blocks tracking major U.S. and global stock and bond markets

Exposure to specific sectors, countries, or other parts of the market

Targeted objectives such as generating an income stream or minimizing volatility

Combined with their low costs and ease of use, ETFs are a very versatile investment product.

Five: Choose your ETF provider as carefully as you choose your ETF.

There are a lot of ETFs out there, but they aren't all created equal. Just like with mutual funds, two ETFs may sound similar, but behave quite differently from each other. Factors such as fees, tax and trading costs and index management can all affect performance and returns. So when choosing individual funds, investors should also do some due diligence on the fund providers. Among the traits to look for: a proven record of strong ETF expertise, a commitment to quality, and enough scale to make trading efficient and liquid.

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Update:

This ETF craze hasn't been tested. I suspect that when the next shock comes to the system brokerage houses won't be able to support the "run on the banks"... and sadly I use the word "banks" because they have over 222 trillion dollars of derivatives exposure. When this balloon decides to pop it won't be pretty. If you are going to speculate at least go for mutual funds. But could the elf coming collapse pull down the mutual fund industry as a whole?  Government won't have the wherewithal to bailout an entire financial industry. And this time it will be another "flash crash" .... IMHO. Most people in ETF's don't know that they don't technically OWN the stocks shown in their fund paperwork. They only own the ETF symbol.