Exchange-Traded Funds: What You Should Know

If you’re looking to invest in an index fund because of its broad exposure to one area of the market and its low fees, you may want to consider an exchange-traded fund (ETF) as well.

ETFs are essentially index funds.

They’re portfolios of stocks, bonds or other securities that can be bought and sold just as investments are.

However, unlike index funds, they trade on a stock exchange in the same way as a stock.

The first ETFs hit the stock market in 1993.

They were originally called SPDRs, or spiders.

Still available today, they track the Standard and Poor’s 500 Index.

After the SPDRs came QQQQs, or qubes. The QQQQs track the 100 largest nonfinancial companies on the Nasdaq.

Today, you can find ETFs that track everything from the entire U.S. stock market to various slices of it, such as large-cap stocks, utilities and real estate investment trusts.

You can even find ETFs that track foreign markets.

ETFs differ from index funds in a crucial way.

When you invest in an index fund, the manager takes your cash and buys more stocks.

When you sell an index fund, the manager sells shares of the fund to pay you.

That type of trading can boost transaction costs and hurt performance.

Because ETFs trade on an exchange just like stocks, when you buy or sell an ETF you’re buying or selling shares from another investor, not a manager.

That can keep fees down.

If you want to learn more about ETFs, your financial advisor – who is familiar with your individual financial circumstances and goals – should be able to help.

Is Cash the Safest Bet for Your Portfolio?

Cash may be king when markets are volatile, but that doesn’t mean it’s without risks.

In troubled times, financial advisors may recommend that investors raise their allocations to cash equivalents, which include vehicles such as Treasury bills, insured fixed-rate certificates of deposit and savings accounts.

There are good reasons for doing so.

Cash, which is presumably risk-free, protects your portfolio from losses.

It also builds reserves you can use to buy riskier assets once the market recovers.

But cash really isn’t risk-free. Investors who are uncomfortable with market volatility and therefore decide to invest solely in cash equivalents must accept the fact that inflation could potentially eat away most of their return.

That’s because the rate of inflation – which in February was at 2.6% annually, according to the Consumer Price Index – may be more than the rate of return offered by these investment vehicles. So, too much reliance on cash may result in a portfolio that cannot keep up with rising prices.

As you approach retirement, and even when you’re in retirement, it may be important to consider keeping some money in growth investments such as stocks and mutual funds.

Your financial advisor, who is familiar with your individual circumstances and goals, can provide you with more information as to what might be suitable for you.