What are ETFs?

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.

Description
ETFs
STOCKS
Mutual Funds
Intraday Liquidity
X
X
Diversification
X
X
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