What is an Exchange-Traded Fund (ETF)?

An Exchange Traded Fund is a collection of securities that tracks or is intended to represent, the performance of either a broad or specific segment of the market (e.g. US equities, small cap, emerging markets).

ETFs are similar to an index mutual fund but trade throughout the day like a stock. Like index mutual funds, ETFs allow investors to track more than hundreds of indexes, as well as specific sectors, industries or other asset classes (e.g. fixed income, currencies, precious metals) that were, until recently, off limits to the average investor.

Similar to individual stocks, ETFs give investors the flexibility to buy and sell on the major stock exchanges throughout the day.

Advantages of ETFs

Low Cost

ETFs typically have low management fees and expense ratios because they require less active management than mutual funds. Most ETFs are designed to track an index, which can mean fewer trades and lower portfolio turnover.

Tax Efficient

Since ETFs are passively managed, they commonly realize fewer capital gains than actively managed funds. This reduces the frequency of tax gain distributions.

Transparent

Investors have all the required information they need to make informed investment decisions using ETFs. Investors have access to all securities held within an ETF on a daily basis.

Liquid

ETFs trade throughout the day so investors can lock in the market value of an ETF at any time during the trading day and can enter or exit a position at anytime, not just at the end of the day.

Exposure to Multiple Asset Classes

The common misconception about exchange-traded funds is that they are primarily used to gain exposure to only broad indexes. With the growth of ETFs in recent years, investors can use ETFs to get exposure in their portfolios to multiple asset classes, sectors, and investment styles not limited to indexes such as the S&P 500, DJIA and Nasdaq Composite. This exposure can provide a client's portfolio with true diversification spread throughout various asset classes.

Vast Exposure

ETFs provide exposure to asset classes which, until recently, were off-limits to the average investor.