Exchange-Traded Funds (or ETFs for short) trade like a common stock, yet typically give broad exposure to the stock market or a specific market sector. They have been around for 2 decades now and were officially launched in the U.S. by State Street Global Advisors in 1993. The very first ETF (and still the largest one today) trades under symbol SPDR, and is commonly called a ‘spider’. The fund tracks the Standard & Poor’s 500 Stock Index, and as of March 31, 2013, held about $129 billion in assets.
ETFs can be a cost effective way to invest because they normally have lower expense ratios than traditional mutual funds. However, because they trade on an exchange like a stock, you often have to pay a commission to buy and sell them. The good news is that as they have become more popular, the issuers have become more competitive. Now some companies offer select funds with commission-free trading. According to Kiplinger’s Personal Finance, Charles Schwab and TD Ameritrade currently offer the largest number of free ETFs, with 105 and 101 respectively. One thing to watch for is that some companies that offer them with no trading costs DO charge a fee if you sell an ETF within 30 days of purchase. Of course, make sure you thoroughly investigate the details of any potential investment in advance.
In addition to low fees, most ETFs have low turnover (buying and selling within the fund), which helps to keep down the amount of capital gains realized and passed-on to the individual investor. This may be a way to reduce or minimize your income tax burden.
Today there are many companies that offer ETFs and the varieties range from those with broad stock market coverage to a single asset class like gold, technology, bonds, or health care, to name a few. With more and more now available, you might want to give ETFs a look-see.