Q:

What is an ETF investment?

A:

Quick Answer

An ETF, or exchange traded fund, pools investors’ money together to purchase a diverse collection of stocks or bonds. It is similar to a mutual fund except shares are obtained through a brokerage, just like shares of individual stocks, instead of directly from a fund company.

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Full Answer

The majority of ETFs are index funds, so instead of being managed by professional advisors who choose which investments to buy and sell, they consist of a set portfolio of securities designed to track a given index.

Part of the appeal of ETFs is their low costs. Annual expenses are typically less than that of a mutual fund which tracks the same index, though some of that advantage may be given up in trading commissions.

Another difference between ETFs and index mutual funds is the greater number of ETFs tracking a wider variety of indices. For example, one can purchase hyper-focused ETFs that only follow stocks in a specific sector or country.

Some ETFs construct portfolios using alternative rules designed to provide investors with higher returns than the traditional approach of weighting holdings based on market value. These ETFs may favor stocks that pay greater dividends or have higher revenues and are therefore less likely to reflect the market’s average return.

ETFs are perhaps most convenient for investors who already have a brokerage account, enabling them to buy or sell an index instantly with the click of a mouse as opposed to going through a professional manager.

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