Understanding ETF Considerations

Investors who are looking for a low-cost investment that offers diversification and tax efficiency may want to consider exchange-traded funds (ETFs)*. ETFs consist of a diversified basket of securities that typically track an index, such as the S&P 500. Purchasing an ETF can give you exposure to an entire industry or sector of the economy. There are many considerations to understand before investing in this or any particular investment.

Sounds Like a Mutual Fund

Both ETFs and mutual funds are managed by SEC-registered investment companies that allow investors to pool their money to buy a professionally managed fund consisting of stocks, bonds, or other assets. Both require a low minimum investment. Investors make money through dividend payments, capital gains distributions and increases in the value or market price of the fund, less sales charges, fees, and expenses.

A Major Difference

The biggest difference between ETFs and mutual funds is in the way they’re bought and sold. ETFs trade on a stock exchange at market prices throughout the trading day. As with individual stocks, you must have an account with a brokerage firm to buy and sell ETF shares. Investors are not charged a fee to purchase or sell ETF shares; however, there may be other transaction costs, such as brokerage commissions.

Mutual fund shares are purchased from and sold back to the fund at their net asset value (NAV), which is calculated at the end of the trading day. You won’t know the exact share price until after the markets close. Fees and expenses for buying, selling, or exchanging shares are charged directly to investors.

An ETF Drawback

Since they’re traded like stocks, ETFs typically can’t be held in an automatic investment account, such as a 401(k). Your financial professional can help you determine if investing in an ETF makes sense for you.

*Investors should consider the investment objectives, risks, charges and expenses of the fund carefully before investing. Contact the issuing firm to obtain a prospectus which should be read carefully before investing or sending money. Because fund values fluctuate, redeemed shares may be worth more or less than their original value. Past performance won’t guarantee future results. An investment in ETFs may result in the loss of principal.