What are ETFs?

Exchange-traded funds, or ETFs, for short, are investment funds that trade on a public stock exchange just like a stock.

Unlike individual stocks, however, ETFs hold dozens and even hundreds of stocks, commodities, or bonds, so you get the safety of diversification. In that way, they’re like mutual funds.

Previously, investors looking for a basket of securities had to opt for mutual funds. While mutual funds provide diversification, they often carry excessive annual fees, sometimes above 1%-2% per year. In addition, many mutual funds also have front-end or back-end fees that investors have to pay when making their initial investment, or when selling their investment.

ETFs, on the other hand, are popular with investors because they typically carry much lower fees, particularly as it pertains to index funds. The other key advantage of ETFs versus mutual funds is liquidity. Mutual funds are priced and traded only once per day, after the market close, whereas ETFs are traded all day. This provides greater liquidity for ETF investors.

At Cabot Wealth Network, we are stock pickers at heart. That said, there are some instances when investing in ETFs makes sense—whether it be gaining maximum exposure to a red-hot sector, gaining access to an entire country’s stock market, or simply taking advantage of a bull market. 

You can invest very specifically, as well. For instance, you can invest in ETFs that focus on environmental or social issues. Others hold only dividend-paying stocks. 

In general, we don’t recommend buying and holding ETFs the way you would a stock with long-term growth potential. But if you time it right, there is money to be made.

To learn more, download your FREE report, How to Invest in Stocks and Other Investing Basics, today. This report will help you take the mystery out of investing and give you the information you need to start investing independently.