Investing Basics flipbook_2024

Exchange-Traded Funds Like a mutual fund, an exchange-traded fund is a portfolio assembled by an investment company. But while mutual funds are priced once daily after the markets close, ETF shares can be bought and sold on an exchange throughout the day just like individual stocks. As a result, supply and demand may cause ETF shares to trade at a premium or a discount relative to the value of the underlying shares. An ETF’s underlying investments are typically selected to track a particular market index, asset class, or sector — or they may share other specific traits. ETFs can be used to create a broad core portfolio or to target narrower market segments. Individual investors must pay a brokerage commission each time ETF shares are traded, but overall, investors may pay less in fees and expenses. Passively managed ETFs generally have lower expense ratios than mutual funds because trades usually occur only when there are changes in the benchmark index. Because of their structure, ETFs also tend to be more tax efficient. In general, investors will trigger capital gains taxes only when they sell shares for a profit. However, some ETFs may occasionally distribute capital gains if there is a shift in the composition of the underlying assets. Some of the characteristics that make ETFs appealing may also make them riskier. For example, the ability to buy or sell shares quickly during market hours could prompt some investors to trade too often or make emotional trading decisions during periods of market volatility.