Let's talk ETFs!

 

 

 

 

 

 

Let’s talk ETFs.  First, what does ETF stand for – Exchange Traded Fund, and what does that define?  An ETF will allow any financially sized investor to build a first class portfolio that will have superior transparency and lower expenses.

EFTs are comparable to a traditional Mutual Fund.  Mutual Funds have existed for approximately 100 years and the funds can be invested in stocks, bonds, commodities, etc.  Secondly, let’s explain how a Mutual Fund works. Rather than strike out individually, a group of investors decide to combine their assets and hire a portfolio manager to oversee the combined assets by putting together a portfolio to meet their goals.  Each investor is assigned a certain number of shares according to their initial investment.  Every day the total value of the portfolio is posted and each investor can determine the value of their portion according to the number of shares they own.  At the close of trading, then a specific calculation is made on the exact cost to buy or sell shares.  Shareholders determine exactly how much of the mutual fund shares they want to own or to sell when they choose. It would depend on their objectives individually.

An ETF is variation of a Mutual Fund; it is a collective venture which also invests in stocks, bonds, commodities, currencies, options or foreign securities.

BUT, there is a difference, and it is a substantial difference.  Want a hint?  Look again at what the acronym ETF means.

The difference is in the word “exchange”.  The same as you would buy shares in a particular stock, ETF shares are purchased through a broker too.  Whereas Mutual Funds can only be bought once only after the close of trading, ETFs can be traded any time the market is open.  Furthermore, an ETF can be bought and sold and bought again all in the same day.  An ETF additionally mimics an index of stocks or the forgoing and like any security it can be sold short, bought on margin, or as a limit or stop-loss order.

More Pro points – lower costs, better tax efficiency

Cons – commissions are a consideration, trading spreads (or legs) could come into play, and you would need to be your own portfolio manager or hire a trusted portfolio manager.

An ETF is just another tool to add to your portfolio that reaches different corners of the market.  Remember it is all about DIVERSIFICATION!  And you can’t spell diversification without and e, t, or f.

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