Erickson Financial Solutions Blog
ETFs Can Provide Some Genuine Benefits To Investors
ETFs may sound like aliens from the "Star Wars" movies. But they're actually an increasingly popular investment in Missouri and across the nation that offers several potential benefits to investors. The acronym stands for exchange-traded fund. And if you don't already have ETFs in your portfolio, you might want to consider adding some to the mix to provide diversification at a low cost.
ETFs are securities that normally track an index, such as the well-known Standard & Poor's (S&P) 500. They are traded on a public stock exchange, so prices fluctuate throughout each trading day. Because of this liquidity, and the fact that fees associated with the investment are typically reasonable, more investors are opting for ETFs.
Technically, the ETF owns underlying assets—such as stocks, bonds, commodities, or foreign currencies—and this ownership is divided into shares for investors. Therefore, you own the ETF's investments indirectly and your shares represent their market value. Also, any ETF may have dozens or hundreds of underlying securities thereby giving you exposure to many securities rather than just one bond or one stock. Another advantage is the ETFs provide tax advantages in that the typical ETF does not trade its component share as often as standard mutual funds.
What's more, ETFs let you diversify across a wide range of underlying investments, while providing investors with other advantages such as being able to buy short or on margin. And taxable gains aren't passed through to shareholders, although you will be taxed on any gains under the usual rules when you sell an ETF. Lastly, the composition of the ETF changes little year-to-year which means what you buy remains much what it was while you own it. This is unlike a mutual fund that may alter its components considerably even in one year.
We can help you determine whether this investment "creature" is suitable for your situation.
Article rewritten by Steven Erickson from an article provided by Advisor Products.