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An exchange-traded fund (ETF) is a pre-packaged group of stocks
that you buy and sell through a broker. ETFs are similar to index
mutual finds in that both track an index and offer diversification.
But ETFs have many characteristics of individual stocks. For example,
you can buy and sell an ETF anytime during a trading session at
its current market price. Like stocks you pay a commission to your
broker to buy and sell an ETF. Also with ETFs, you can buy and sell
options and buy on margin. You can short an ETF. With some ETFs
you can reinvest dividends. Because ETFs are not managed, they have
low service fees.
Why Buy an ETF?
If you want to frequently buy and sell the market or an industry
sector, an ETF is the right product. You can trade it just like
you trade a stock. Most mutual funds frown on frequent trading and
you can only buy and sell mutual funds at the end-of-day price.
Index funds are not designed as trading instruments. |
