What is an ETF?
Sometimes, reading the financial news can seem a little bit like alphabet soup. This is because many investing terms are referred to by acronyms. While this is great for brevity, it can be confusing when you haven’t learned what the terms stand for or what they mean yet.
In today’s infographic, we’re going to demystify at least one of these mysterious acronyms by explaining what an ETF is, and why it’s worth considering in your investment portfolio.
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What is an ETF?
The acronym ETF stands for “exchange-traded fund”. It’s a type of fund that owns underlying assets which might include stocks, bonds, gold bars, oil futures, and foreign currencies.
Ownership of these assets is divided into shares, and ETF shareholders are entitled to a portion of the profits, which might be realized by earned interest or dividends paid. If the fund is liquidated, they may receive residual value.
How do you invest in an ETF? An ETF can be bought and sold just like company common stock during trading hours. Like a stock, an ETF has a ticker symbol and intraday price data which can easily be obtained throughout the course of the trading day.
Important things to know about an ETF: In the infographic, we offer a great primer on all things ETF, including a clear look at some of the different types of ETF, and the history of the ETF. We also address several need-to-know things about an ETF, including:
Unlike a company stock, the number of shares outstanding for an ETF can change on a daily basis, because new shares are constantly being created and existing shares are constantly being redeemed.
Unlike a mutual fund, an ETF does not have its net asset value (NAV) calculated once at the end of every day.
Ownership of the fund can be bought, sold, or transferred in much the same way as stock shares, since ETF shares are traded on the same exchanges.
Why invest in an ETF?
In the infographic, we offer a comprehensive look at the pros and cons associated with investing in an ETF. On the positive side, for instance, they’re tax efficient and you can move in and out of the markets quickly. However, on the negative side, ETF sales are not settled for 3 days after a transaction, which means that your funds won’t be available for other investments for a few days. By reading through the pros and cons listed, you’ll be better equipped to make the decision for yourself about whether or not an ETF is right for you.
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