ETFs may sound like aliens from the "Star Wars" movies. But they're actually an increasingly popular investment that offers more potential benefits than some comparable offerings. The acronym stands for exchange-traded fund. And if you don't already have ETFs in your portfolio, you might want to consider adding some.
ETFs are securities that normally track an index, such as the well-known Standard & Poor's 500, and are often similar to an index mutual fund. Unlike mutual funds, however, ETFs are traded on a public stock exchange, so prices fluctuate throughout each trading day. Because of this liquidity, and fees that are typically lower than those on mutual funds, some investors prefer ETFs over the traditional funds.
Technically, the ETF owns underlying assets—such as stocks, bonds, commodities, or foreign currencies—and this ownership is divided into shares for investors. You own the ETF's investments indirectly and your shares represent their market value.
Like an index fund, ETFs let you diversify across a wide range of underlying investments, while providing investors with other advantages such as being able to buy short or on margin. And taxable gains aren't passed through to shareholders, as they are from mutual funds, though you will be taxed on any gains when you sell an ETF.
We can help you determine whether this investment "creature" is suitable for your situation.