Most ETFs are designed to track (or mimic) a major index, like the S&P 500. Shares generally rise and fall in value along with the index. Some ETFs track sector-specific indexes, such as utility company stocks, or high-tech stocks. Some ETFs allow you to participate in the commodities markets, including oil and gas or gold, without having to take delivery of the commodity itself, which could be hard on your mailbox.
Diversification Reduces Risk
Some people win the lottery, and some invest in just the right company at just the right time. The rest rely on diversification.
Both mutual funds and ETFs offer you exposure to different stocks in a variety of industries or countries. Some ETFs, like some mutual funds, are broadly diversified, while others target specific types of securities or industries. Both investment vehicles avoid linking your financial fate to the fortunes (and misfortunes) of one business, one industry, or one economy.
ETFs Can be Cheaper to Buy
When you buy shares of a mutual fund, you may have to pay a "load" or sales charge, either upfront when you buy your shares, or when you go to sell them. Or both. Brokerage fees on ETFs range from $5 to $10 or more per transaction, depending on what your broker charges.
Caveat: Because transaction fees add up over time, you may be better off investing a lump sum in an ETF rather than making periodic investments.
Of course, if you buy shares of a "no-load" mutual fund, you do not incur any sales charge or brokerage fees, in most instances.
ETFs Can be Cheaper to Own
Most mutual funds are actively managed by professionals who expect to be handsomely paid for their expertise. In pursuit of their objective, they also buy and sell securities, incurring brokerage fees, taxes and other expenses.
Since most ETFs are not managed, trading activity is typically lower and there are fewer highly paid fund managers. (ETFs tied to an index must buy or sell securities from time to time to rebalance the portfolio, keeping it in line with the index.) While actively managed mutual funds hope to outperform their benchmark index - and some of them do so some of the time - the goal of most ETFs is just to mimic an index.
ETFs are More "Transparent"
Mutual funds are required by law to report to shareholders at least twice a year, providing a list of all the securities in the portfolio as of the date of publication. This information is usually published on the internet as well, and most fund groups post performance information on their websites. Not bad. But ETFs update their investment lists on the internet at intervals throughout each business day, so you can find out exactly which securities you own through your ETF. See lists of ETFs and their indexes.
Major caveat: Like any security or mutual fund, there are no assurances that you will make a profit if you invest in an ETF. The market experience of 2008 provided graphic proof that even mighty companies can be whittled down to a very small size or collapse entirely. The end of the capitalist world may be at hand, or this may be the beginning of something new. Your call.
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