What is an ETF?

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>> An exchange traded fund, or ETF, is an investment vehicle that looks a lot like a mutual fund, but with some important distinctions. ETFs were created to represent a basket of securities that track a stock, bond, real estate, or commodity index. While ETFs and funds both offer broad diversification, ETFs charge lower annual management fees than actively managed and indexed mutual funds. ETFs carry a more favorable capital gains tax profile than managed mutual funds. The reason is that there's no trading in and out of securities. An ETF remains pegged to its corresponding index. Tax efficiency can help active traders or those in higher tax brackets. ETFs trade like stocks, which means you can buy and sell them intra-day, versus a mutual fund where purchases and sales are based on the closing price on the day of the transaction. This feature is attractive, but comes at a price. You pay a brokerage fee when you buy or sell ETFs, a drawback for those who make small and frequent transactions. If you invest a small amount on a monthly basis, no-load index funds may be a more affordable option than ETFs for you.

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