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Exchange Traded Funds (ETFs)
What are ETFs?
An exchange traded fund (ETF) is a basket of securities designed to replicate the performance of a stock or bond index (e.g., S&P 500, Dow Jones Industrial Average, Nasdaq 100 Index). Most ETFs are listed on an exchange and can be traded intra-day at a price set by the market. QQQQ is traded on the Nasdaq.
ETFs add the flexibility, ease, and liquidity of stock trading to the benefits of traditional index fund investing. This has made ETFs very popular among investors since the early 1990s and Firstrade has more than 150 ETFs available to its customers.
The Advantages of ETFs
ETFs can be described as a "hybrid" of mutual funds and stocks. By combining the benefits of two popular investment vehicles into one convenient package, ETFs provide the following advantages:
- Diversification:
By investing in an ETF, you are buying into a basket of securities, thereby diversifying your investment and reducing your risk. The level of diversification achieved is dependant on the type of ETF selected. If you invest in an ETF that covers the entire market, it will be a well diversified investment with lower risk. If you invest in an ETF that tracks a sector such as biotech, it will be more risky than the aforementioned ETF but less volatile than an individual stock.
- Lower Cost:
ETFs, in general, have significantly lower expenses than traditional mutual funds. ETFs are less likely to experience high management fees because they are index-based and not "actively" managed. And, since they trade on an exchange, ETFs are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions. In fact, buying ETFs through Firstrade only costs $6.95.
- Trading Flexibility:
Unlike mutual funds, which are priced once a day, ETFs are priced and traded throughout the day and allow for margin, short sales and options, giving you flexibility beyond what traditional mutual funds can offer.
- Transparency:
ETFs are designed to generally replicate the holdings and track the performance of the underlying index.
- Tax Efficiency:
Don't let taxes dictate the way you invest. An ETF tracks an index, making it less prone to turnover, resulting in lower capital gains tax.
- Global Investing:
There are ETFs that track markets in various regions or countries, making it an ideal way to invest overseas.
- Dividends:
ETFs receive the dividends paid out by the companies held in the ETF and are subsequently distributed to ETF holders, less expenses.
Buying ETFs
The process of buying ETFs through Firstrade is identical to that of buying stock. Just enter the ETF symbol, designate the number of shares, enter the price desired (if limit order) and submit the order. Since an ETF trade is charged the same commission as a regular stock trade, Firstrade makes ETFs affordable for everyone.
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Click here to see how simple it is to buy an ETF using our interactive demo. Then start investing in the exciting world of ETFs! |
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For an array of ETFs, and for more information on this exciting product, please visit the website of the American Stock Exchange, birthplace of the ETF.
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