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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand. |
One major benefit of investing in Exchange Traded Funds is they provide a less expensive and lower risk way to invest in diversified stocks. Why You May Want to Consider Exchange Traded Funds By Britt Erica Tunick If investing in stocks is something you’ve always wanted to do, yet have avoided because you are afraid of picking the wrong company, you may want to consider exchange traded funds (ETFs). Much like mutual funds, ETFs are baskets of stocks designed to give investors access to a large collection of companies instead of just one. Unlike mutual funds, which typically charge fees both when you buy into them and when you sell them, as well as regular maintenance fees and possibly even broker fees, there are no fees for buying or selling ETFs. ETFs trade on an exchange the same way that individual stocks do. While mutual funds typically have rules about when their shares can be bought and sold, ETF shares can be bought or sold at any point during market hours. Though the value of mutual fund shares are only determined once each day at the close of trading and are based on the overall value of the fund’s combined assets, ETF share prices fluctuate through the day, as they are based not only on the underlying value of the assets they contain, but also on real time trading activity. There are currently more than 5,000 ETFs available, with a wide range of variations designed to provide investors exposure to a specific sector, such as technology or real estate; a specific asset class, such as bonds; to an entire index, like the S&P 500; or to certain investment vehicles, such as commodities. While mutual funds are actively balanced and reweighted by fund managers, which is why they tend to have higher fees, ETFs also have fund managers, but they are not as actively managed. One major benefit of investing in ETFs is that they provide a relatively inexpensive way to access a diversified collection of stocks without the risk of individually selecting which stocks to invest in. They can also be a good way to access more elaborate trading approaches and strategies such as short selling. Because they are actively traded, it is easy to jump in or out of an ETF. Nonetheless, all ETFs are not created the same and, therefore, there can be as much variance in the way that individual ETFs perform as there is in the way that individual stocks trade. Similarly, since there are variations in ETF structures it is important to look closely at the terms and conditions for each ETF, particularly if you are considering different ETFs that follow the same index or sector. |
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