Exchange traded funds (ETFs) have been in existence since the early 80s, but in the past 10 years they have become increasingly popular amongst investors. ETFs are funds that track indexes such as the S&P 500, Dow Jones Industrials, etc. When you buy shares of an Exchange Traded Fund, you are buying shares of a portfolio which tracks the yield/return of its respective index. The main difference between an ETF and other mutual funds is that ETFs don’t try to outperform their index, they just replicate its performance. ETFs are not attempting to beat the market. Lets take a look at other differences.
ETFs vs Mutual Funds
Both ETFs and mutual funds are inexpensive ways to own the market. There are some major differences however
– FEES: ETFs are typically less expensive when compared to the expense ratio of the average index mutual fund.
– COMMISSIONS:ETFs are typically less expensive in terms of commissions too. They can be anywhere from commission-free to $7-$10 per trade. Mutual funds on the other hand can be expensive to trade (upwards of $40), especially if your brokerage doesn’t also own/manage the particular fund.
– LIQUIDITY: Buying or selling an index fund means you’ll get end of day pricing. ETFs trade like stocks