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.