Do you know about Exchange – Traded Fund (ETF)? ETF is a marketable security that tracks an index, a commodity bonds, or a basket of assets like an index fund.
An ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typicalaly have higher daily liquidity and lower fees than mutual fund shares, making them an attravtive alternative for individual investors.
ETF is a type of fund which owns the underlying assets (shares of stock, bonds, oil future, gold bars, foreign currency) and divides ownership of those assets into shares. The actual investment vehicle structure will vary by country and within one country there can be multiple structures that co-exist. Shareholders do not directly own or have any direct claim to the underlying investments in the fund; rather they indirectly own these assets.
ETF shareholders are entitled to a proportion of the profits sucn as earned interest or dividens paid, and they may get a residual value in case the fund is liquidated. The ownership of the fund can easily be bought, sold or transferred in much the same was as shares of stock, since ETF shares are traded on public stock exchanges.
As ETFs become more popular, new indexes are being developed for ETFs to track. As a result, some ETFs are beginning to look more like active mutual funds with higher costs, higher expenses, and lower tax efficiency.
There’s many advantages and disadvantages of ETF such as :-
1. Convenience: Investing in ETFs are as easy as investing in stocks. You just need to buy one as you would buy any regular stock.
2. Low fees. Like index fund, ETFs have low fees. You can expect the management fee to be about .1% for S&P 500 trackers like IVV and SPY. The management fees are higher for more exotic ETFs like the Russell 2000 Index ETF (IWN) and Vanguard Emerging Markets ETF (VWO).
3. Tax efficient. There are no unexpected capital gains/losses when you purchase an ETF. Sell when tax-wise it makes the most sense to you.
1. Convenience. The ease of buying/selling an ETF means you might sell an ETF when you later believed you should have held on. Of course, solidinvestment discipline will avoid this disadvantage.
2. Market spread. If you are buying a rare ETF, the buy/ask spread might be somewhat significant. This can be avoided if you invest in the major ETFs.
3. Index fund disadvantages. Since you gain the advantages of an index fund (like low fees), you also receive most of the disadvantages as well. Because an ETF blindly follows an index, it means it holds shares ofstocks you might not like that happen to be in that index.
ETFs are most appropriate for investors with long-term investment goals and a large lump sum to invest. The brokerage costs incurred on every trade make ETFs too costly for those looking to invest small sums or for those who wish to build their assets with frequent small purchases.
In addition, sophisticated investors and large institutions can use the breadth of ETF offerings to target specific market segments in their portfolios.
Investing via an ETF requires a certain amount of preparation, planning and awareness. For savvy investors, ETFs present an alternative to individual securities and mutual funds.