What is an ETF?

Exchange traded funds (ETFs) are securities which derive their value from a basket of securities, such as stocks, bonds, or commodities, and are traded similar to individual stocks on an exchange. When you purchase an ETF, you are purchasing shares of the overall portfolio, not the actual shares of the underlying investments or index components. ETFs can track a wide variety of sector-specific, country-specific, and broad-market indexes. ETFs may provide diversification to your overall portfolio because one share or one unit may represent multiple underlying stocks, bonds, and/or other investments.

Why are ETFs so popular now?

Although they have existed since the early 1990s, there are now many ETF choices that allow individual investors to easily access markets in a cost-effective and typically tax-efficient manner. The broad range of ETFs that exist today empowers investors to take part in many markets at any given time without requiring a large upfront investment. ETFs can be passively managed and track widely known indices, can be based on factors as determined by the ETF sponsor, or can be actively managed.

Who may invest in an ETF?

Cost-effectiveness may be a key benefit of an ETF, particularly if you meet any or all of these criteria:

  1. You use a discount broker or an online broker such as WellsTrade®
  2. You invest a large lump sum
  3. You invest for the long term

ETFs are traded on an exchange, and transactions typically occur between investors, which can lower the operational overhead and expense ratio. Trading costs such as spreads, commissions, or even discounts or premiums, may lessen the cost benefits.

ETFs and your risk tolerance

Unlike mutual funds, which assign pricing based on end-of-day net asset value, the price of an ETF changes throughout the trading day. ETFs are priced and can be purchased and sold throughout the trading day, which may give the investor some flexibility and control over the price they pay or receive and the timing of when they buy or sell shares. Furthermore, you can buy or sell ETF shares on a stock exchange much like the purchase or sale of any other listed stock.

ETFs are also subject to risks similar to those of stocks and mutual funds. Investment returns may fluctuate and are subject to market volatility, so that an investor's shares, when redeemed or sold, may be worth more or less than their original cost.

Exchange Traded funds may yield investment results that, before expenses, generally correspond to the price and yield of a particular index. There is no assurance that the price and yield performance of the index can be fully matched.

Sound investment strategies help you manage your risk and costs as well as consider how the various investment tools in your portfolio contribute to long-term financial goals. Meet with your Financial Advisor to discuss whether an ETF is an appropriate investment to add to your portfolio.

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