What is an ETF?

A simpler, more cost-efficient way to invest.

ETFs are baskets of securities that allow you to track hundreds of domestic and international indexes. Some mirror well-known indexes like the S&P 500 or the NASDAQ 100, and some track securities specific to a particular industry or country.

What are some of the features that make ETFs special?

  • Low Management Fees. Management fees charged by ETFs are generally lower than those charged by mutual funds, making ETFs more cost-efficient. Although brokerage commissions apply when trading ETFs, the benefit in lower management fees can potentially offset those commissions.
  • Performance. Without high management fees, ETFs can potentially outperform actively managed mutual funds over time. While ETFs are designed to track rather than outperform indices, relatively few active fund managers historically match or beat their fund's benchmarks over the long term.
  • Transparency. ETFs contain clearly defined baskets of securities that change only when the underlying index does.
  • Tax Efficiency. Because they rarely trigger capital gains, ETFs are generally more tax-efficient than mutual funds.
  • Intraday Pricing. ETFs can be bought or sold at any time during the trading day, just like stocks. In contrast, mutual funds are priced only at the end of each trading day.

    Note that because ETFs trade like stocks, price fluctuations might cause them to trade at a premium or discount to their underlying securities.

Anatomy of an ETF

ETFs are often referred to as hybrid securities, because they contain attributes of both Mutual Funds and individual stocks and bonds. For an illustration of what that means, look at the table below to see how ETFs represent the best of both worlds.

Attribute ETF Individual Equity Mutual Fund
Management Fees Historically Low None Historically high; industry average 1.44%
Charge 12b-1 Fees Usually none; maximum allowed is .07% No Maximum 1%
Intraday Pricing Yes Yes No
Transparency Yes Yes No
May Be Bought On Margin Yes Yes No
May Be Sold Short Yes Yes No
Control Over Capital Gains Yes Yes No
Pay Dividends Yes Yes Yes

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