What is an Exchanged Traded Fund?

By Daniel Heffernan
Aprill 2018

 

Why have investors been piling money into Exchange Traded Funds (or “ETFs” as they are known) in recent years and what makes them different from other investments? The answer: they combine favorable traits of various investment vehicles such as individual stocks, actively managed mutual funds and index mutual funds.

Diversification:

Exchange traded funds – like mutual funds and index mutual funds – are a "basket" of tens, hundreds or sometimes thousands of stocks or bonds in a single fund. So for those investors who ever owned a mutual fund, then owning an ETF will feel familiar as it has the same potential for diversification.  An investor looking to quickly gain portfolio exposure to specific sectors, styles, industries, or countries can do so in a diversified ETF without the expertise needed to pick individual securities in that area. 

Flexible Trading:

In addition, ETF investing does share similarities with investing in individual stocks. For those investors who have ever traded an individual stock, then buying and selling of an ETF will feel very familiar as they are traded the same way. Like stocks, ETFs trade during the day and are bought and sold in real-time. This is generally seen as one of the advantages over mutual funds, which price only once after the markets close at 4:00 p.m. ET. These features may help ETF investors by increasing efficiency and flexibility when managing their portfolio. It’s important to note, however, that an ETF does not trade at net asset value. Much like stocks, they trade on major stock exchanges and their pricing will fluctuate throughout the day. ETFs may also have wide bid-ask spreads for thinly traded issues or in volatile environments.

Lower Cost:

ETFs have also benefited from price compression similar to that of a low cost indexed fund. For example, while low cost does not necessarily guarantee better returns, it can lead to fee savings within investors’ portfolios over an extended period of time.  With ETF assets nearing $4.5 trillion as of the end of 2017 (according to data from State Street Global Advisors), they have become a popular investment choice for both retail and institutional investors alike. The investment world is constantly evolving; we see it as our job to stay on top of trends and innovations in the market place. While we believe this innovation is a net positive for investors, we realize that not all ETFs are created equal and carefully review the risks associated with all investments. Given these trends, if you’re considering ETF’s give us a call to see if we can help.

 

An exchange-traded fund (ETF) is similar to a mutual fund that tracks a specific stock or bond index, such as the Barclays Capital 1–3 Year Treasury Index. Like stock investing, ETF investing involves principal risk—the chance that you won’t get all the money back that you originally invested. These products are also subject to market risk, the risks and liquidity of its underlying holdings, and secondary market price. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisionsDiversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.