ETFs or Exchange Traded Funds have been available in the U.S. since around 1993. While they are not a new product, there appears to be quite a bit of unfamiliarity with the structure and benefits of this type of investment product.
In plain English, an Exchange Traded Fund or “ETF” is an investment fund or investment product that allows an investor to purchase (or sell) a portfolio of assets (typically stocks or bonds) that mirror or simulate an index (basket of securities) in one consolidated product, similar to a stock. So if you were to purchase one share of an ETF, you may actually be buying a basket of 100 stocks.
To illustrate this further, see how ETFs compare versus a common stock and a mutual fund.
|Lower Investment Minimums||X||X||X
|Lower Investment Thresholds||X||X||X
|Daily/Intraday Price Transparancy||X||X||possible
|Can Buy on Margin||X||X||
|Can Use Various order types (Limits or Stop Orders)||X||X||
ETF Structural Benefits
– Transparency -you can view all underlying assets in the ETF (INDEX) Daily
– Efficiency – trades like a common stock on an exchange with intraday/real time pricing
– Diversification – shown to potentially reduce volatility by holding basket(s) of securities across the index
– Flexibility – trades like common stock and you can use various order types
– Tax Efficiency – potentially lessens and possibly avoids capital gains distributions