Learn about Exchange-Traded Funds (ETFs)

Exchange-Traded Funds are the Smarter Way to Invest

 

First introduced in 1993, Exchange-Traded Funds (ETFs) are rapidly becoming the investment tool of choice for millions of investors. ETFs allow investors to easily implement a wide range of investment strategies from the most basic to the most sophisticated. Today, there are over 2,000 different ETFs with total assets exceeding $2 trillion making ETFs the fastest growing investment product in the history of Wall Street. On an average day, ETFs account for over 1/3 of all trading volume on the New York Stock Exchange.

What are ETFs?

Simply put, ETFs are a better investment structure that combine the most attractive features of mutual funds and common stocks.

Like index mutual funds, virtually all ETFs are designed to track the performance of a specific market index and represent ownership in a diversified portfolio. Like shares of stocks, ETFs trade throughout the day adding a level of liquidity not available with mutual funds. Essentially, ETFs are index mutual funds that look, feel and act like common stocks, offering investors the best of both worlds.

ETF Characteristics

Exchange-traded funds offer investors benefits such as:

 

  • Low costs – ETFs generally have lower expense ratios (annual operating costs) than actively managed mutual funds.

 

  • Trading flexibility – Unlike mutual funds, ETFs can be traded throughout the day. Investors have greater portfolio management flexibility.

 

  • Tax efficient – Because of their structure, ETFs usually provide a tax advantage relative to actively managed mutual funds.

 

  • Transparency – ETFs hold the same securities, or a representative sample of their benchmark indexes, so they’re transparent and easy to understand.

 

  • Diversification – An ETF might contain hundreds or thousands of securities, more than many actively managed mutual funds, providing a high level of diversification.

 

  • Index-based performance – Since the vast majority of ETFs are index based, they offer investors all of the performance advantages associated with indexing.

ETFs versus Actively Managed Mutual Funds

Because of their unique hybrid structure, ETFs offer investors numerous advantages when compared to traditional actively managed mutual funds.





Exchange-Traded Fund
Actively Managed Mutual Fund





Average Annual Internal Fees
0.15%
1.30%




Taxable Distributions
Limited
Potentially Large




Liquidity
Continuous
End-of-Day




Investor Impact on Portfolio
Limited
Unlimited




Performance
Index-Based
Actively Managed




Transparent Portfolio
Yes
No




Access to a Diversified Portfolio with a Single Purchase
Yes
Yes




Potential for Manager/Style Drift
No
Yes

Types of ETFs

Exchange-Traded Funds are the most efficient, cost-effective way for investors to build broadly diversified portfolios. There are ETFs tracking virtually every part of the capital markets from the broadest market benchmarks comprised of thousands of securities to industry-specific ETFs with less than 20 securities.

ETFs are available tracking:

  • The entire Gobal Stock Market
  • Total U.S. Market
  • Equity by Size (Large Cap, Mid Cap, Small Cap, and Micro Cap)
  • Asset Style (Growth or Value)
  • Country or Region of the World
  • Emerging Markets
  • Industry or Economic Sector
  • Commodity
  • Natural Resources
  • Inverse and Leveraged
  • Fixed Income
  • Specialty ETFs

What Types of Investors Use ETFs?

Many different types of investors use ETFs. Multiple surveys show that the typical ETF investor tends to be more knowledgeable about the market, better educated, and have a higher net worth than the average traditional mutual fund investor. Institutional and retail investors alike use ETFs on a regular basis. ETFs can be used in the same types of accounts as mutual funds, including IRAs, trust accounts, individual brokerage accounts, 401k plans, foundations, SEP-IRAs, Simple IRAs, Roth IRAs, and Rollover IRAs.

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Download Strategic Index Investing Book

To learn more about ETFs, request your complimentary copy of Strategic Index Investing: Unlocking the Power of Exchange-Traded Funds, written by Richard D. Romey, President of ETF Portfolio Partners.

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