Contents
What’s an Investment?
Risk and Risk Tolerance
Asset Allocation and Diversification
Should You Be Investing?
How to Get Started Investing
How to Invest in Stocks
How to Invest in Bonds
How to Invest in Mutual Funds
How to Invest in ETFs
Investing and Taxes
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How to Invest in ETFs
ETFs (exchange-traded funds) are index funds that trade like stocks. They offer the broad diversification of mutual funds with the instant liquidity of stocks.
Types of ETFs Available
The few hundred available ETFs don’t yet rival the selection offered by the thousands of mutual funds on the market. Even so, an equivalent ETF exists for virtually every type of index fund, including ETFs that track indexes of stocks, bonds, real estate, commodities, specific sectors and
industries, and so on.
How to Buy and Sell ETFs
ETFs are offered by traditional mutual fund companies and by financial firms, such as iShares (www.ishares.com), PowerShares (www.powershares.com), and Rydex (www.rydexfunds.com), that specialize in ETFs. Like individual stocks, ETFs each have a ticker symbol and can be bought and sold through a broker or brokerage house at any time throughout the trading day.
Why Buy ETFs Instead of Mutual Funds?
There are three reasons to consider ETFs instead of funds:
- Low expenses: ETFs typically have low expense ratios, many of which are even lower than those of comparable index mutual funds.
- Trading flexibility: ETFs can be bought and sold throughout the trading day, unlike mutual funds.
- Innovative indexes: ETF companies can create and track indexes not offered by mutual funds. For instance, the PowerShares Value Line Industry Rotation ETF contains an index of stocks that adjusts quarterly based on whichever stock sector is most in favor.
Why Buy Mutual Funds Instead of ETFs?
Despite the many advantages of ETFs, there are a few reasons why mutual funds might still be your better choice.
- Transaction costs: As with stocks, you’ll have to pay a commission each time you buy or sell an ETF. If you’d like to buy your investments gradually, in stages, without paying commissions each time, no-load mutual funds are a better choice than ETFs because you won’t have to pay any transaction fees.
- Selection: If you’re looking for a particular type of investment for which no ETF exists, your only choice might be a mutual fund.
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