Friday, August 31, 2012

WTF are ETFs?

Pardon my French, but when I'm reading financial magazines and sites, it seems that ETFs are coming up more and more often. Which begs the question, WTF are ETFs? I've wondered it for a while, but never looked into it much. Well, today (or last night I guess) that changes. Here's what I found:

ETFs stands for Exchange-Traded Funds. What are they? Well, when a daddy stock and a mommy mutual fund love each other very much... Bet you didn't think things were going to get all rated-R up in here. That is a good way of thinking about it though, or at least one way of thinking about it.

Basically, an ETF is a collection of individual stocks, bonds, or other securities like a traditional mutual fund. Except it is priced and traded throughout the day like a stock. So, why would you want an ETF instead of a mutual fund?

1) You can buy and sell them at any point during the day, including shorting, limit orders, etc.
2) The annual expenses are generally much lower than mutual funds.
3) Because of the underlying structure, they are typically more tax efficient.

There are also a few things to watch out for, like commissions, which can eat away at the gains from lower annual expenses. However, depending on your broker, there could be no commissions at all.

Having learned the information listed above and doing some additional reading at my brokerage (Vanguard), I'm thinking that we will convert our mutual fund holdings into ETFs. I like the idea of being able to buy into an index fund during the day and knowing what price I am paying.  The tax and expense efficiencies don't hurt either.

Do you invest in mutual funds or ETFs?

No comments:

Post a Comment