an exchange-traded fund or ETF is an
investment fund that trades like a stock
ETFs like other types of funds pull
together money from investors into a
basket of different investments
including stocks bonds and other
securities by spreading the funds money
into different securities ETFs can
generally provide investors with
diversification which can help balance
risk and because ETF shares are traded
on the stock exchange they're bought and
sold like stocks and usually incur
commissions and other related fees just
like there are a variety of mutual funds
there are a variety of different ETFs
each with different objectives some ETFs
invest in a variety of stocks and bonds
some replicate the performance of a
stock index like the Dow Jones
Industrial Average or S&P 500 and others
track the performance of a particular
market sector like technology or
pharmaceuticals however different ETFs
offer different amounts of
diversification for example ETFs that
focus more on specific sectors typically
offer less diversification than those
that are designed to replicate an index
let's look at an example of investing in
an ETF suppose an investor wants to make
a diversified investment that is
designed to mirror the performance of a
major stock index like the S&P 500 after
researching different ETFs and finding
the one he wants based on his objective
he purchases shares of it through his
broker just like he would an individual
stock now that he owns shares the
investor has a stake in each of the
funds basket of investments while only
having to purchase one ETF participating
in the wide market with only a single
purchase instead of multiple purchases
can save an investor research and
analysis time so how can an investor
potentially achieve a positive return
from the ETF similar to a stock you can
earn a return two ways a rising ETF
market price and dividends typically if
the value of the ETFs investments
increases so does its price if our
investor purchased a hypothetical ETF at
$40 and a year later it was selling for
$50 our investor could profit $10 per
share by selling his position of course
if the
TFS price dropped our Investor would
have lost money if the position was sold
at the lower price because many ETFs are
traded on a stock exchange they can be
bought and sold throughout the day
however not all ETFs are widely traded
which can cause difficulty when trying
to fill orders now compare this to a
mutual fund most mutual funds are only
priced and traded at the end of the day
separate from changes in price our
investor could potentially gain income
if the ETF pays its investors a dividend
which is a payout of part of the funds
earnings and capital gains not all ETFs
pay dividends many instead reinvest
earnings into the funds holdings one of
the ways to tell whether a fund pays
dividends is to look at what's called
its dividend yield this yield is the
amount that the fund pays out compared
to the current market price of a share
ETFs have other attractive qualities
while most mutual funds require a
minimum investment which can be
substantial an etf investor can just buy
a single share plus any commissions and
fees also because most ETFs aren't
actively managed they typically have
lower management fees than mutual funds
there is a wide variety of ETFs that
attempt to track assets like corporate
bonds stocks and remote countries
commodities and even currencies among
many other investments while these
assets carry unique risks the ETFs that
track them offer investors a practical
way to analyze and potentially find
opportunities in a number of markets
want to learn more about ETFs and other
investments continue exploring premier
education brought to you by TD
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