| When people ask for investing advice, | | | | structure of ETFs generally allow for |
| ETFs usually come up pretty quickly, | | | | liquidation of a position faster than a |
| because they are so heavily marketed and | | | | mutual fund, which must be liquidated at |
| trumped by the industry. Exchange-traded | | | | end of day. Further, the ability to set |
| funds, or ETFs, are an easy way to | | | | a limit order allows flexible trading |
| diversify a small investment, but to get | | | | that no investor could get from a mutual |
| the most out of your investment, it is | | | | fund. Not all ETFs have the same |
| important to understand how they | | | | liquidity, however, and it is important |
| operate. | | | | to review trading volumes and the ETF |
| ETFs are like mutual funds, in that they | | | | prospectus to determine whether you are |
| are a collection of investments, but | | | | comfortable with the frequency of |
| they are traded on an exchange, such as | | | | trades. |
| the NYSE, instead of purchased directly | | | | 4. Intraday Pricing: Because ETFs are |
| from the issuing company. They also | | | | traded on active stock exchanges, |
| differ in their redemption structure and | | | | purchases and sales happen at market |
| tax efficiency from traditional mutual | | | | prices, rather than end-of-day Net Asset |
| funds. | | | | Value, which mutual funds use. As a |
| Here are five benefits of ETFs over | | | | result, one may purchase ETFs at a |
| mutual funds: | | | | premium or a discount to the value of |
| 1. Tax Efficiency: Upon redemption, | | | | the underlying assets, and arbitrage is |
| mutual funds must sell its underlying | | | | frequent. |
| securities, and the capital gains are | | | | 5. No Minimum Investment: When starting |
| then distributed to the owners of the | | | | investing, diversification can be cost |
| funds. Since ETFs trade on an exchange | | | | prohibitive if you're using traditional |
| and investors are selling to other | | | | mutual funds, which frequently have a |
| investors, no underlying securities are | | | | minimum investment of $2500 or more. |
| sold, and no capital gains are | | | | Because ETFs have no minimum investment |
| distributed. If the makeup of the ETF | | | | (other than the market price of one |
| changes it will, occasionally have to | | | | share), they are a good vehicle for |
| distribute gains, but it should be less | | | | diversified investing. |
| frequent than with traditional mutual | | | | Of course, many of these benefits could |
| funds. | | | | be liabilities if not used properly. For |
| 2. Lower Fees: ETFs are no-load funds, | | | | instance, the intraday pricing feature |
| and you won't be slapped with a | | | | of ETFs could lead an investor to buy an |
| redemption fee when it's time to | | | | ETF at a premium or sell it at a |
| liquidate your position. Further, ETFs | | | | discount to the value of the underlying |
| typically have lower annual fees than | | | | securities. Also, brokerage fees may |
| traditional Mutual Funds, making them an | | | | have a greater impact on some investors |
| attractive alternative. (NOTE: In rare | | | | than traditional mutual funds' |
| cases where a very small amount is being | | | | management fees and loads would have. |
| traded, broker's fees may be a higher | | | | Used wisely, ETFs can be a good vehicle |
| percentage of the investment than a | | | | for widely diversifying a small or |
| mutual fund's expenses would be, but in | | | | initial investment, but it is always |
| most of these cases the invested amount | | | | best to seek professional investing |
| would not meet the minimum investment | | | | advice. |
| required by most mutual funds). | | | | In the future I will cover the five |
| 3. Liquidity: The exchange-traded | | | | negatives of investing in ETFs. |