Exchange Traded Funds. Likely you’ve heard of them. But you may not know exactly what they are or how they could work for you.

The truth is ETFs are an easy and low-cost way to invest across many stock and bond markets. But even as they’ve gained broad investor acceptance and lots of media attention, many people still have questions about them, such as, “Why should I use ETFs?” and “How do I buy them?” Here, we cut through the noise and offer some key facts about ETFs.

Once you understand the benefits of ETFs, you’ll see how they could be an exciting and smart way to help meet your financial goals, no matter your age, investment experience, or how much money you’re looking to invest.

The simple facts

Let’s dissect what the name “ETF” actually means. ETFs are investment funds that trade like a stock. Made up of a mix of stocks and/or bonds, most are designed to track a major index, like the S&P 500 or the Russell 2000.

Index ETFs aim to match the returns of their market index, often at a lower cost than most mutual funds. Over time, you may do better than if you were invested in a similar mutual fund. In fact, for some markets, ETFs may outperform active mutual funds.

Put simply, ETFs can help you:

  1. Save money — ETF managers help keep fees low by managing a fund to track its benchmark index. And the taxable capital gains distributions of an ETF can be lower than the average mutual fund. Over the long term, these savings can really add up. Note that you may need to pay a trading commission to buy or sell an ETF (just like a stock), although some brokerages let you trade many ETFs for free.
  2. Diversify your portfolio — There are many ETFs to fit your personal investment goals — whether it’s building a diversified core across broad markets, investing in short- or medium-term opportunities, or targeting a specific purpose such as cushioning against jumpy markets. You can quickly achieve broad diversification with a single ETF that contains both stocks and bonds. Or choose from specific asset classes, sectors, geographic regions or countries.
  3. Quickly capture market opportunities — ETFs offer the same trading flexibility as stocks, meaning you know the price throughout the day and can easily buy and sell them during market hours using limit, market or stop-loss orders.  
  4. Earn income — Many ETFs pay dividends, and some focus specifically on high-dividend-paying companies, which can be important if you’re looking for potential regular income. ETFs are also an easy way to access bond markets.
  5. Manage risk — There’s a growing array of ETFs that can help you hedge currency risk on foreign investments, reduce market volatility, or target specific “factors” such as growth-oriented companies.
  6. Stay invested — Rather than parking your money in low-interest cash accounts, you can invest in an ETF and still have the potential to earn market returns while you save for short-term goals or decide on specific stocks or bonds to buy. Of course investing in ETFs comes with more risk and volatility than cash accounts. But you may also have better growth potential.

The bottom line

ETFs are not new. They’ve been around for over 20 years, and more investors of all types are turning to them. Some $3 trillion is invested globally through ETFs, and that number continues to grow. (Source: BlackRock, as of 8/7/15.)  

What’s exciting about ETFs is they answer very simple questions many people have about investing: “How can I earn more, keep more, and ensure I am investing smartly across the world’s markets?”

Whether you work closely with a financial planner or manage your investments yourself, ETFs can help you build a diversified portfolio in a cost-efficient way. You can use ETFs for specific investment objectives, such as income generation, or to act on your market views without having to take on the challenge of picking individual stocks or bonds. Whatever your goals, you can almost certainly find ETFs that work for you.

For more information on the differences between ETFs and mutual funds, please click here.

Heather is Head of BlackRock Personal Investing. She started her career as a financial advisor, spending many years helping investors plan for their futures. 

 

More from BlackRock:

4 Ways to Consider ETFs for Your Portfolio

How to Choose the Right ETF

What’s the Difference Between a Bond ETF and an Equity ETF?

 

Investing involves risk, including possible loss of principal. Transactions in shares of ETFs will result in brokerage commissions and will generate tax consequences. All regulated investment companies are obliged to distribute portfolio gains to shareholders.  Certain traditional mutual funds can also be tax efficient. Diversification and asset allocation may not protect against market risk or loss of principal. There is no guarantee that any ETF will pay dividends.

This contains general information only and does not take into account an individual's financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision. There is no guarantee that any strategies discussed will be effective.

BLACKROCK is a registered trademark of BlackRock, Inc. All other marks are the property of their respective owners. iS-16235-0815

Investopedia and BlackRock have or may have had an advertising relationship, either directly or indirectly. This post is not paid for or sponsored by BlackRock, and is separate from any advertising partnership that may exist between the companies. The views reflected within are solely those of BlackRock and their Authors.

 

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