Exchange-Traded Funds: What You Need to Know

Exchange-traded funds, also known as ETFs.’s, have surged in popularity in recent years, and the number and types of products have proliferated.

Many ETFs are simply mutual fund-like but specifically pegged to financial indexes and with an added benefit: They can be traded throughout the day just like a stock, where traditional mutual funds are priced only once a day, at the end of trading. A good example is State Street's SPDR S&P 500 ETF (SPY) which mirrors the S&P 500. Many other ETFs hold a basket of stocks which are not actively bought and sold as they are in mutual funds. An example here is Vanguard's Dividend Appreciation ETF (VIG) which holds blue chip companies with a ten year history of delivering dividends to investors.

Many people like exchange-traded funds, or ETFs, for the same reasons they like index funds: they provide easy access to broad spheres of the market, while keeping costs and taxes low. Because they are not actively managed like mutual funds, management fees associated with mutual funds are significantly reduced. And because there is not active buying and selling within the ETF, capital gains from the result of those trades are minimized and as a result not passed on to the ETF investor.

When choosing an ETF, stick with well-known and time-tested providers such as Barclays Global Investors, Vanguard, and State Street. In most cases, you want to invest in the least expensive funds with recognizable indexes. It’s also wise to invest in larger funds with more assets, which means they will be easier and less expensive to trade.