The biggest comparison between ETFs and mutual funds is that ETFs trade on exchanges and can also be sold short, which cannot be done with mutual funds.
An index fund is a mutual fund that tracks an index of stocks, bonds or other securities.
An exchange-traded fund, or ETF, is an investment company bought and sold on a stock exchange.
Advantage of ETFs
The most significant advantage of ETFs is that you diversify your investments, while mutual funds are not required to do so.
A mutual fund
When one company in a mutual fund goes terrible, it’s on some people’s radar, and they often don’t even know about the problem until it’s too late.
A mutual fund can also make an important decision at any time, while some ETF trades may only take place during regular trading hours.
ETFs come in three varieties
Index funds, active funds and leveraged funds – all having varying levels of risk.
Index-based ETFs attempt to mimic or track the performance of a particular market index.
Actively managed ETFs are designed to outperform the market instead of tracking specific indexes.
And finally, leveraged ETFs are meant to magnify the potential of their underlying index or benchmark.
ETFs have both advantages and disadvantages
On the one hand, they offer instant diversification then allow for easy reinvestment dividends, which is not typically an option when investing in individual stocks through a brokerage account.
On the other hand, ETFs carry annual fees; investors need to consider these, which can offset any diversification benefits.
Exchange-traded index funds
Exchange-traded index funds sound appealing because they are typically low-cost and tax-efficient. They have very low expense ratios and no loads or commissions.
In addition, many of them give exposure to international markets and commodities investing options. ETFs trade on a stock exchange and typically follow an index similar to a mutual fund.
Unlike unit trusts and OEICs, they do not sell new units directly to investors and only issue units to “authorized participants”, such as institutional investors such as banks and pension funds who trade large quantities of shares at low cost.
However, as mentioned before, ETFs are still funded and incur fees based on their money management strategy or structure – including front-end or deferred sales charges.
Accordingly, these will be deducted from your investment when you buy them or sell these units later on.
They may also incur redemption fees if you sell your units early without meeting specific holding period requirements (usually one year).
ETFs are traded intraday on the exchange, like individual stocks. The market price of an ETF differs throughout the trading day, based on both market supply and demand (similar to shares of common stock) and the underlying value of its portfolio holdings.
One good reason is that they should never be bought or sold at a ” NAVPU” (NAV per unit).
Similarly to closed-end funds, some ETFs trade at a premium or discount from their net asset value.
As more investors buy the units, the demand may drive the price far above or below net asset value. In contrast, as fewer investors want them, the opposite can occur – thus creating potential opportunities for arbitrage and hedging strategies.).
ETFs allow investors to trade entire sectors with a single click. An investor looking for high technology stocks may find that investing in companies like Google and Apple would be too expensive or risky.
However, through an ETF tied to the S&P 500 tech sector index, she will gain exposure to over fifty different tech companies with a straightforward stock transaction.
The best way to start learning about ETFs is by looking at how they work.
It will allow investors to understand better what it takes to be successful when trading them on any site dedicated for this purpose.
It also shows them what kind of investments exist within the global market.
Link to ETF for more information.