Interesting Facts About ETFs
Exchange traded funds (ETFs) seem to be in their ascendancy. Investment interest—along with their assets—is shifting from ordinary mutual funds to their exchange-traded alternatives. Despite the fact that they can buy and sell mutual funds without the help of a broker, many investors are choosing to go the ETF route. ETFs can be purchased at any brokerage firm, just like any stock. The management fees associated with them are considerably lower than those associated with active-managed mutual funds. Additionally, with a traditional mutual fund, the trader can buy or sell the fund only at the closing price when the trading day comes to an end. ETFs, on the other hand, can be traded any time the market is open.
Of course, mutual funds can outperform the market, while ETFs are tied to the performance of the indices to which they are attached. It is entirely possible that any given mutual fund will provide a better return on investment than any given ETF, but such is not necessarily the case. The fact that a fund outperformed the market yesterday is no guarantee that it will do so tomorrow. While some investors enjoy taking aggressive risks, others prefer to stay with an instrument that guarantees a certain average market return. For them, ETFs provide a less risky alternative to mutual funds and other investment vehicles. On the other hand, those other investment vehicles are insured by the Depository Trust Clearing Corporation, while ETFs are not. Nonetheless, fraud and abuse with ETFs has been negligible; every application to create an exchange traded fund receives a thorough examination by the SEC.
ETFs can be created around any liquid asset with a published index. Precious metals, real estate, stocks and bonds are all potential assets for ETFs. Many of them are now international; Europe, Japan, China, Australia, and nearly all other developed countries have established indices of liquid assets that can be converted into ETFs. Market analysts predict that more and more countries throughout the world will begin offering them as their economies develop and stabilize. In the United States, they are available to anyone who can establish a brokerage account. (Interestingly, there are four developed countries that decidedly do not offer ETFs: Pakistan, Iran, Saudi Arabia, and Argentina. This is most likely a politically driven phenomenon.)
One of the characteristics of ETFs that draws potential investors is their lack of a minimum investment requirement. While some mutual funds require a minimum investment of up to $50,000, investors can buy into an ETF at any amount. Additionally, while investors must redeem mutual funds for the net asset value at the end of the trading day, ETFs offer intraday trading options. Any time the market is open, investors can sell these assets (assuming, of course, that they can find an investor who’s willing to buy.)
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