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Ever since Exchange-Traded Funds came along in 2008 they have been the toast of wall street. Financial advisors have been recommending them for easy diversification with somewhat higher yields for sometime now. Mutual funds have load fees which can be costly, usually have a minimum investment, and have lackluster yields of the industry the fund is working in goes bad. Even with a good industry a mutual fund is lucky to do 5% a year. ETFs are different. Exchange-Traded Funds or ETFs are the perfect way for an amateur investor to diverse, engage in emerging markets trading, and much more. ETFs are popular for a simple reason, its stock trading meets mutual fund safety.
How they work:
ETFs are simple instruments because they are based on mutual funds. Imagine if you could instantly trade a variety of mutual funds like stocks, single shares that are apart of larger companies. Trading in that manner is exactly why ETFs were created. ETFs track securities like an index fund but trade like stocks on open exchanges. The price fluctuates similar to a stock throughout the day so the NAV is not calculated because the value changes rapidly.
The Advantages
ETFs are the perfect marriage between the boring and low yielding mutual fund and the fast paced world of stocks. You get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. This is all because ETFs are traded as one stock. This is all combined with the safety of a mutual fund without all the fees.
ETFs are a great option for those with low investment capital, those who desperately need to diversify, or even those who want to get involved in an industry in a big way quickly without alot of excessive research. Talk to your financial advisor about ETFs soon.