What are ETFs?
An exchange-traded fund (ETF) is a basket of securities, shares of which are sold on an exchange. They combine features and potential benefits of stocks and mutual funds.
Like individual stocks, ETF shares are traded throughout the day at prices that change based on supply and demand. Like mutual fund shares, ETF shares represent partial ownership of a portfolio that's assembled by professional managers.
ETFs offer a number of potential advantages, including the following.
- ETFs may be more tax efficient than some traditional mutual funds. A mutual fund manager may trade stocks to satisfy investor redemptions or to pursue the fund's objectives. Selling shares may create taxable gains for the fund's shareholders. In addition, managers of index-based ETFs generally only make trades to match changes in their index, which may mean greater tax efficiency.
- Like stocks, ETFs are sold at real-time prices and trade throughout the day. Mutual funds, on the other hand, do not have this flexibility: Their pricing is based on end-of-day trading prices.
- An ETF may be a good way to add diversification to your portfolio. Buying shares of a technology sector ETF, for example, could potentially be less risky than purchasing shares of one technology stock – an ETF may own shares of many different technology companies.
Saving and investing basics
Please consider the charges, risks, expenses and investment objectives carefully before purchasing a mutual fund or exchange-traded fund. For a prospectus containing this and other information, please contact a financial professional. Read it carefully before you invest or send money.