WHAT is an ETF?
An ETF is a basket of securities that you can buy or sell through a brokerage firm on a stock exchange.
Just like a stock, an ETF has a ticker symbol and intraday price data can be easily obtained during the course of the trading day. It allows you to access a bundle of stocks that you wouldn’t be able to buy with your own limited funds.
Can you trade ETFs?
Yes, you can. ETFs trade like stocks. You can buy or sell shares at any time during the trading day. This unlike mutual funds when your order to buy or sell shares is processed at the end of the day.
What do you do if you haven’t decided what stock to buy?
Buy ETF. If you plan to invest in stocks but have not yet decided what particular stocks to buy, get an ETF that holds the stocks that you want to buy.
When are ETFs a good fit?
ETFs can be useful investments, but it’s important to know whether they’re right for you.
Here are some guidelines for deciding whether to consider ETFs, and to help you understand when an ETF isn’t the right fit. If you’re trying to get market returns and you’re investing a large amount of money at one time, traditional ETFs might be a good choice because of their low cost and broad diversification.
When are ETFs not a good fit?
ETFs may not fit well if you’re trying to beat the market or if you’re making small, regular investments.
Buying an ETF means that you won’t have the chance of performing any better than the market the ETF tracks, since you’ll only get the returns of that market index (with the exception of the very few actively managed ETFs that currently exist). Conversely, an actively managed fund aims to beat its market (though it has the potential to lag that market). Because you generally pay a commission for each ETF trade, small investments are usually better made in a no-load, no-transaction-fee mutual fund. That said, some ETFs are available commission-free at some brokerages—these ETFs may be suitable for small, regular investments. If you’re trying to round out your portfolio’s asset allocation, a traditional or niche ETF could be a good fit. If you generally like to pick individual stocks but you don’t know much about a certain sector or region, you could use an ETF to complement your stock allocation so that you’re more broadly diversified. Again, be sure to consider the cost of commissions and whether you want active management before choosing an ETF over a mutual fund.
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Victor Santos Sy graduated Cum Laude from UE with a BBA and from Indiana State University with an MBA. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation in Pasadena, California.
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He has 50 years of experience in defending taxpayers audited by the IRS, FTB, EDD, BOE and other governmental agencies. He is publishing a book on his expertise – “HOW TO AVOID OR SURVIVE IRS AUDITS.” Our readers may inquire about the book or email tax questions at [email protected].
