Exchange Traded Funds
Diversification and flexibility.
Exchange-traded funds (ETFs) invest in stocks*, bonds* or commodities that track a particular index such as the Dow Jones or the S&P 500. Other ETFs can follow specific sectors such as technology, real estate or natural resources. Unlike mutual funds*, ETFs are bought and sold on an exchange much like stocks.
Advantages of exchange-traded funds.
- A simple way to get a good mix of investments without having to watch them closely like stocks.
- Diversification reduces the risk, since the investment is across an entire index or market sector.
- Management costs are lower than mutual funds; instead of having an active manager, they passively track an index.
- Pricing is transparent and easily accountable because ETFs are bought and sold throughout the day like stocks at current market prices.
- ETFs are tax-efficient; over time they may generate lower capital gains than mutual funds because they're typically traded less often.
- In many cases, ETFs have outperformed actively managed funds over time.
Are ETFs right for everyone?
Like anything involving the stock markets, ETFs do involve some element of risk, along with the potential for higher returns. If your savings are targeted for a specific use in the near term – such as a down payment on a home – ETFs may not be the best option. If you have a longer-term investment horizon of five years or more, they can become an integral part of a well-diversified portfolio.
It’s also important to know that if you wish to purchase ETF units on a monthly basis, you incur the brokerage fee every time they're purchased just as you do with any stock trade. If you are someone who likes to buy and sell often, these fees will reduce your overall return unless you are working with your advisor under an OnPoint fee-based brokerage program, where you have the benefit of advisor-based, full-service investment management.
ETFs or mutual funds?
ETFs are relatively new investment vehicles and they have sparked considerable debate within the investment community. Some discussions revolve around comparing the financial returns of active vs. passive management; others focus on contrasting transaction and management fees. Ultimately, both types of funds may have a role to play in a well-balanced portfolio. Your advisor can help you determine the right mix as part of your financial plan.