Exchange-traded funds are similar to mutual funds. Investing in an ETF can give you a stake in several different assets (e.g. stocks, commodities, and bonds). ETFs are bought and sold on a stock exchange like common stocks, which makes them more volatile. Prices are determined more by market forces and less by the underlying value of fund holdings.
- Like stocks, the share price of an ETF fluctuates throughout the trading day, because it is traded on an exchange. Like mutual funds, your investment is more diversified than it is with individual stocks.
- ETFs sometimes charge lower fees than do mutual funds.
- ETFs come in two varieties: active and passive. Passive ETFs are index funds designed to track specific benchmarks, such as the SPDR. They are not guided by a fund manager and will rise and fall with the market as a whole. Active ETFs are handled by a fund manager or investing team that chooses the securities that the fund will invest in. These funds are intended not to track an index but to beat it through strategic purchasing decisions. This means they have the potential for higher than average returns. Fees, however, tend to be higher for these ETFs
- As with mutual funds, choose ETFs if you lack the time or expertise to invest in individual stocks.