An Exchange Traded Fund (ETF) resembles a Mutual Fund in many ways, but there are also key differences.
By: Robert F. Abbott, freelance writer and author of Big Macs & Our Pensions
You may have looked at an Exchange Traded Fund or two in your investment research. ETFs are relative newcomers in the investment world, and have jostled with mutual funds to get a share of our investing dollars.
And, they’ve done well; many investors now use them in much the same way they used or now use mutual funds. In fact, it’s sometimes difficult to tell them apart. But, in this excellent 5-and-a-half minute video from the people at E*Trade, you’ll have a good grasp of what they are how they might fit into your investing plans:
A couple of notes to follow up on the video. First, in my early days of investing, I found it easier to buy and sell mutual funds than ETFs. The reason? Mutual fund prices update once a day after the market closes, so I could look at a price and take several hours to consider whether or not I wanted to buy or sell at that price.
On the other hand, an Exchange Traded Fund price keeps changing, all day (at least as long as the market is open). So, I had to make decisions relatively quickly. This varied, of course, from ETF to ETF, because some are less volatile (smaller or less frequent price changes) than others. A small detail, but one that did affect my buying and selling.
In the video, you heard that E*Trade has a screener that will help you find or at least shortlist ETFs, according to your needs and risk tolerance. I expect the E*Trade screener is a good one (I have not seen it), but if you do not have access to it, many more screeners can be found online with a simple search engine search.
More Exchange Traded Fund Advice
The presenters of this video make a point well worth repeating. Check out what you’re getting before you commit yourself to it. You’ll find many of the tools I explained in this website’s Top Mutual Funds series will help you understand and make better decisions about the funds you choose.
To start, I would recommend reading the Sharpe Ratio article, which explains how you can compare fund returns against the risk to which you are exposed.