What are ETFs?

One of the latest types of investments is the Exchange Traded Fund, aka the ETF. This fund is a mix of a stock and index fund, but is used for investment in a specific market.

ETFs are treated and traded like all other stock on the stock exchange although they exhibit performances of a specific index. ETFs are usually bought through a broker, while dividends are given to stock holders. The only difference between ETFs and stocks are that they are fixed portfolio of securities mirroring a particular index. The S&P 500 Index Fund is the first exchange traded fund which began its trading on the American Stock Exchange in 1993.

ETFs can be bought individually, for a short term and on a margin. The commission for ETFs is the same as on any regular trade. The ETF can be easily bought from a broker, and is a great means of diversification. It provides diversification because many stocks and bonds in an ETF. When buying ETFs, it is always better to avoid investing ETFs that invest in similar stocks.

Today, there are more than one hundred exchange traded funds around. These ETFs cover the broadest market index like S&P 500. The main benefit of an ETF is the tax efficiency it offers. This is because since the shares of ETFs don’t have to be distributed every year, you owe tax only when you sell ETF shares. However, since ETFS sometimes make capital-gains and dividend distributions, it is necessary to pay some tax.

One of the main benefits of having an ETF in the portfolio is that it creates a varied investment portfolio. The ETF along with US stocks, bonds, and other foreign stocks provide a portfolio that presents a superior return on investments, with limited risk. Just as much that ETFs prove beneficial to a portfolio, there are also a few drawbacks to it. The main drawback is that you have to buy ETFs through brokers as you would buy stocks. With these brokers, there is a need for paying commissions. This aspect of paying commission makes the buying and selling of ETFs a drawback to a portfolio.

Moreover, this commission makes ETFs an expensive choice for those individuals who would like to invest on a regular basis. This is due to the fact that the commission reduces the returns you would other wise expect from the investment. Buying ETFs from discount brokers may reduce the expenditure you will have to make for your investment.