What Is ETFs Trading (2024)

This type of investment has been around since 1993 but fewtraders chose to utilize it until about adecade later when it became an appealing investment option because of better tax treatment than with index and mutual funds.Today many traders are invested in ETFs (which are a type of index fund, which is a type of mutual fund),whether they know it or not, because various investment companies currently hold ETF securitiesto the tune of over $3trillion, a sizable portionof all investments held and managed by brokerson behalf of clients worldwide.

What is an Index Fund?

An index fund is passively managed and comprised of portfolios constructed to match or track components of an investment market “index” like Standard & Poor’s 500 (S&P 500), NASDAQ, Dow Jones, etc. Indices are statistical measures of the fluctuations in investorportfolios of stocks that represent a certain portion of the overall market inwhichthey aretraded.

The Vanguard Group launched the first index fund in 1976, when its founder John C. Bogle believedthatthe stock market could not “be beaten” and money could notbe madeby tradingin and out of the markets, especially in light ofbrokercommissions and costs involved to do so.

Bogle created an investment indexfund that tracked the S&P 500while keeping costs lowwith passive management and reducedfees.Today there are hundreds of different index funds, each trackingitsown unique benchmark andrequiringvaryingfees and broker commissions.

Benchmarks arethestandards against which an asset’s performance is measuredand many indices like the S&P 500, NASDAQ, etc.are used to“benchmark“the performance of variousotherinvestment funds, including index funds and mutual funds.

Whatis aMutual Fund?

An index fund is a type of mutual fund which is an investment that is activelymanaged by a professional stockbrokeron behalf of a group of individual investors.Mutualfunds often involve minimum purchases that can be quite high depending on the asset.

Mutual fund managersarebrokers and investors whoare usually college graduates with expertise in finance, marketing or other related field whoactively try to beat the markets on behalf of theclients whose mutual fund accounts they manage.

The brokers‘ongoing involvement with various investmentskeeps them abreast of the latestmarkets, sectors,industries,trends andprices, which makes them better able to determine the best money making strategies and investmentopportunitiesin which toinvestmoney they manage on behalf ofclients.

Exchange Traded Funds Summary

ETF securitiesare available in a broadrange of financial assets including foreign currencies, stocks, bonds, commodities, oil ETFs and more.

ETFs provide the diversity necessary to protect an investor’sfinancial bottom line by spreadinginvestment moneyacross a wider arena of possibilities instead of placing all investment funds in one market, sector or industry.

Passive broker management of ETFsallowsfor reducedcommissions which combines with fewertransaction fees and less costs overall toenableinvestors to diversify theirportfolios and trade more actively in a variety of investment markets.

ETFs are cost effective means of investing in a broad range of assets, while increasingtransparency by allowing investors to know exactly which assets in which they are investedand how they performthroughout the day.

ETFs can help an investor grow money because they generally cost less thanothertypes of investments and allow access to a wide range of markets or sectors targeted to a certain goal.

ETFsallowfor combining what wouldotherwise have been several trades into a single trade savingmoney intransaction fees.

ETFs are overseen by experienced portfolio managers who seek to closely match the ETF to its benchmark index while minimizing the potential for anyunwantedcapital gains distributions that can greatly affect thebottom line.

ETFsdifferfrom managed investment accounts in which the manager actively tries to beat the market, which can be very difficult to achieve and involve much higher brokerfees, more costs and greatertax consequences.