A colleague of mine posed an interesting question last week. He asked what advice I’d give to somebody relatively new to investing that had $1 million to invest right now.
What Are ETFs?
The term ETF is short for Exchange-Traded Fund – a security that tracks an index, commodity or basket of stocks. An ETF is somewhat similar to an index fund except that shares of an ETF trade just like a stock on a stock exchange, so they can be bought and sold very easily. ETFs are valuable investment tools because, unlike mutual funds, they can be traded throughout the course of a day.
Most ETFs track indexes. For example, the SPDR S&P 500 (NYSE: SPY) tracks the Standard & Poor’s 500, while PowerShares QQQ (NYSE: QQQ) tracks the Nasdaq-100.
ETFs can be appealing to investors for several reasons:
ETFs allow investors to sell short, buy on margin, and purchase as little as one share at a time
With lower management fees, ETFs are less expensive than mutual funds
ETFs can efficiently help diversify an investor’s portfolio
ETFs allow people to invest in a specific industry
ETF gains aren’t taxed as heavily as those earned through mutual funds
Downsides to ETFs are that, like stocks, they typically have to be bought through a broker; some countries have limited ETF markets; and they aren’t all necessarily designed for long-term investors. While not for everybody, ETFs are a good way for investors to diversify their portfolios at a low cost.
To browse through a comprehensive list of ETFs, visit Yahoo! Finance’s Exchange-Traded Fund Center.
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