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Exchange-Traded Funds

Exchange-traded funds (ETFs) are like mutual funds, but they're traded like stocks and often have lower expenses. Learn how different ETFs can work for your portfolio.

Your Guide to Investing in ETFs

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How to Invest in ETFs
Frequently Asked Questions
  • What are ETFs?

    ETFs or exchange traded funds,like mutual funds pool investors money to invest in a basket of securities. But unlike mutual funds, ETFs trade like stocks, which means investors can buy or sell ETFs on an exchange at any time. Typically, ETFs passively track indexes implying lower costs, though some ETFs may be actively managed. ETFs are also considered more tax-efficient compared to mutual funds.

  • How do ETFs work?

    ETF shares give the investor proportionate ownership on the ETF. You can trade them like stocks on the exchange, and you pay the ETF market price which may differ from the net asset value. Most ETFs replicate constituents of their benchmark index in order to track its performance. There are many types of ETFs, some more risky and narrowly focused than other. They offer a lower cost and more tax-efficient alternative to mutual funds.

  • How many ETFs should I own?

    There is no prescribed number of ETFs you must have, it depends on your goals and investment strategy. You could invest in thematic ETFs for diversification and to gain exposure to commodities, currencies on even international markets or you could build an entire portfolio out of just 3 ETFs. You can also use ETFs to employ advanced short-selling and hedging strategies. Select ETFs based on the role you want them to play in your portfolio, expenses and performance.

  • How do I invest in ETFs?

    To invest in ETFs, you would first need a trading account. You could open one up with your broker or with a fund company like Vanguard that has such accounts. The next step would be to fund your account using a payment method. Narrow down ETFs based on your investing strategy and compare different ETFs using an ETF screener. Select the ETF you intend to purchase and place the order.

  • How are ETFs priced?

    ETF prices are by both exchange supply and demand, as well as the value of the underlying assets. The ETF share price is what is reflected on the exchange and what you pay for when you buy an ETF share. The ETF’s net asset value (NAV) is the value based on its underlying assets which is calculated once a day. An ETF may trade at a premium or discount to the NAV, but such price differentials are small and temporary.

  • How do I pick ETFs?

    There are a number of factors to consider before you select ETFs best suited for your needs. These include your investment goals and strategy and the role you expect the ETF to play in your portfolio. Compare the ETF’s assets, expenses and performance not just to its peers but also other actively managed funds. While ETFs may be more tax efficient than mutual funds, they may still have tax implications.

  • Are ETFs tax efficient?

    You incur capital gains tax liability when you sell an asset for profit. With mutual funds, that liability occurs even if you don’t sell shares in the fund, but the fund manager sells securities from the fund’s portfolio for a profit. Typically, ETFs mirror indexes which means lower trading of underlying units. ETF dividends are taxed based on how long you’ve held the ETF shares. Capital gains from some ETFs like precious metals, commodities or currency ETFs may be taxed differently at higher rates.

  • What are leveraged ETFs?

    A leveraged ETF uses borrowed money, futures, and swaps to increase the returns of an index, commodity, or other types of investments. They greatly increase the risk and costs of investing. A 3x leveraged ETF could use stocks listed on the S&P 500 index to create three times the returns or three times the loss. Leveraged ETFs are not long term investments and resets everyday.

Key Terms

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