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What is an ETF?

 

ETF stands for exchange-traded fund.  An ETF a special kind of security that is like a mutual fund in its composition, but has a share price that allows trading throughout the trading day, unlike mutual funds which only settle at the end of the day.

 

ETFs offer many advantages for casual investors.  The first is the ability to diversify one’s portfolio by purchasing a single security.  The second is the flexibility to trade in and out of ETFs throughout the day in order to easily rebalance the portfolio.  The final advantage is that ETFs tend to have lower fees and commissions than those associated with individual stock purchases. 

 

Even though ETFs have several enticing advantages, they are not without some disadvantages.  For example, ETFs that are actively managed will have higher fees and commissions due to the active management component.  Another disadvantage is that those ETFs that consist solely of organizations within a single industry or sector give the illusion of diversity, but in fact do not provide it.