Exchange-Traded Funds (2024)

FAQs

What is an exchange-traded fund quizlet? ›

An exchange-traded fund is an investment vehicle that combines some features from mutual funds and some from individual stocks. They are typically structured as open-end mutual fund trusts.

ETFs or "exchange-traded funds" are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index. When you invest in an ETF, you get a bundle of assets you can buy and sell during market hours—potentially lowering your risk and exposure, while helping to diversify your portfolio.

Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.

An exchange-traded fund (ETF) is a basket of securities that trades on an exchange just like a stock does. ETF share prices fluctuate all day as the ETF is bought and sold; this is different from mutual funds, which only trade once a day after the market closes.

Exchange funds pool large amounts of concentrated shareholders of different companies into a single investment pool. The purpose is to allow large shareholders in a single corporation to exchange their concentrated holding in exchange for a share in the pool's more diversified portfolio.

Exchange-traded funds work like this: The fund provider owns the underlying assets, designs a fund to track their performance and then sells shares in that fund to investors. Shareholders own a portion of an ETF, but they don't own the underlying assets in the fund.

What is an ETF? An exchange-traded fund, or ETF, allows investors to buy many stocks or bonds at once. Investors buy shares of ETFs, and the money is used to invest according to a certain objective. For example, if you buy an S&P 500 ETF, your money will be invested in the 500 companies in that index.

The SPDR S&P 500 ETF Trust (SPY) seeks to track the performance of the S&P 500 index, which is a cap-weighted basket of the largest publicly traded companies in the U.S. SPY is the oldest ETF listed on a U.S. exchange and is the largest ETF as measured by AUM.

Vanguard S&P 500 ETF

Exchange-traded funds (ETFs) are one of the safer types of investments out there, as they require less effort than investing in individual stocks while also increasing diversification.

What ETF is beating the S&P 500? ›

The Vanguard S&P 500 Growth Index Fund ETF (NYSEMKT: VOOG) has trounced the S&P 500 this year with a gain of nearly 15.7%. As its name indicates, this ETF focuses on growth stocks in the S&P 500. There are many of them, as this ETF owns 229 stocks. Its top holdings include Microsoft, Apple, and Nvidia.

A lazy portfolio is a collection of investments that require minimal management. It typically consists of a few (or even one) diversified, low-cost index funds or ETFs (exchange-traded funds). You can also get index mutual funds that will also do the job.

You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.

Holding an ETF for longer than a year may get you a more favorable capital gains tax rate when you sell your investment.

ETFs can offer lower operating costs than traditional open-end funds, flexible trading, greater transparency, and better tax efficiency in taxable accounts. As with all investment choices there are elements to review when making an investment decision.

Passive, or index, ETFs generally track and aim to outperform a benchmark index. They provide access to many companies or investments in one trade, whereas individual stocks provide exposure to a single firm. As such, ETFs remove single-stock risk, or the risk inherent in being exposed to just one company.

How are ETFs and mutual funds different? How are they managed? While they can be actively or passively managed by fund managers, most ETFs are passive investments pegged to the performance of a particular index. Mutual funds come in both active and indexed varieties, but most are actively managed.

For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio. In addition, ETFs tend to have much lower expense ratios compared to actively managed funds, can be more tax-efficient, and offer the option to immediately reinvest dividends.