Exchange-Traded Funds (ETFs) Offer Diversification With Low Fees
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 funds because 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.
ETFs are ideal for the busy person, who does not have the time to follow individual stocks. With an ETF you own many stocks so you are have a ready made diversified stock portfolio.
To get the best price, use limit orders when buying and selling ETFs.