Exchange Traded Funds
Exchange traded funds (otherwise known as EFTs) are a type of investment vehicle similar in nature to a mutual fund. An exchange traded fund actually holds assets such as stocks or bonds and trades at the net asset value of its current held assets over the course of the trading day.
Where an EFT differs from a mutual fund, is that its shares are actually traded openly on the stock exchanges throughout the day. A mutual fund’s price each day is determined by the share price of its various holdings at the end of the day. When you issue a sell order on a mutual fund, it is sold based on the ending price of the stocks held at the close of the trading day on the date your sell order is posted.
An exchange traded fund’s share price moves throughout the day just like a normal share of stock. Because it trades like a stock, an investor can use the same trading techniques as normal stocks, such as selling short, limit orders, stop loss orders, etc.
Most exchange traded funds follow some type of index such as the S&P 500. This means that the securities held in the EFT must be part of the index they are mirroring. Exchange traded funds can also include commodities, bonds, and foreign currencies. For example, you can find a gold EFT under the symbol ‘GLD’. Through an EFT an investor can participate in trading that he or she might not normally be accustomed to, such as foreign currency investing.
Another advantage of EFTs is that their fees are generally considered lower than mutual funds. There is less management costs associated with the EFT. However, you want to be cautious in the fee area, because trading EFTs is usually subject to brokerage fees, just like a regular stock. Let’s say you have a discount brokerage account that charges you $10 per trade and you want to put $100 in your favorite EFT each month. You are basically losing about 10% off the top because of the cost of each associated trade ($100 less $10 for the actual trade). This would certainly be more than if you contributed $100 per month to a similar mutual fund.
Exchange traded funds are a good investment tool for someone who does not have time to follow the market closely but still wants to own a particular sector of stocks. There has been some criticism of EFTs because they do not allow the diversity that some advisors recommend. It does insulate the investor from any one company, but if the entire sector is declining, your EFT is going down too. However, they are certainly an investment tool that someone should evaluate if they are interested in some diversity, low fees, and a “stock” like feel to the investment.
Exchange traded funds (otherwise known as EFTs) are a type of investment vehicle similar in nature to a mutual fund. An exchange traded fund actually holds assets such as stocks or bonds and trades at the net asset value of its current held assets over the course of the trading day.
Where an EFT differs from a mutual fund, is that its shares are actually traded openly on the stock exchanges throughout the day. A mutual fund’s price each day is determined by the share price of its various holdings at the end of the day. When you issue a sell order on a mutual fund, it is sold based on the ending price of the stocks held at the close of the trading day on the date your sell order is posted.
An exchange traded fund’s share price moves throughout the day just like a normal share of stock. Because it trades like a stock, an investor can use the same trading techniques as normal stocks, such as selling short, limit orders, stop loss orders, etc.
Most exchange traded funds follow some type of index such as the S&P 500. This means that the securities held in the EFT must be part of the index they are mirroring. Exchange traded funds can also include commodities, bonds, and foreign currencies. For example, you can find a gold EFT under the symbol ‘GLD’. Through an EFT an investor can participate in trading that he or she might not normally be accustomed to, such as foreign currency investing.
Another advantage of EFTs is that their fees are generally considered lower than mutual funds. There is less management costs associated with the EFT. However, you want to be cautious in the fee area, because trading EFTs is usually subject to brokerage fees, just like a regular stock. Let’s say you have a discount brokerage account that charges you $10 per trade and you want to put $100 in your favorite EFT each month. You are basically losing about 10% off the top because of the cost of each associated trade ($100 less $10 for the actual trade). This would certainly be more than if you contributed $100 per month to a similar mutual fund.
Exchange traded funds are a good investment tool for someone who does not have time to follow the market closely but still wants to own a particular sector of stocks. There has been some criticism of EFTs because they do not allow the diversity that some advisors recommend. It does insulate the investor from any one company, but if the entire sector is declining, your EFT is going down too. However, they are certainly an investment tool that someone should evaluate if they are interested in some diversity, low fees, and a “stock” like feel to the investment.