Understanding Exchange-Traded Funds (ETFs)

An Exchange-Traded Fund (ETF) is a type of investment fund and marketable security that tracks an index, commodity, bonds or a basket of assets like an index fund. Unlike mutual funds, ETFs trade like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold.

ETFs are important for providing investors with the flexibility of trading stocks alongside the diversification benefits of mutual funds. They are known for their cost-efficiency, lower expense ratios and tax advantages compared to traditional mutual funds.

• Liquidity: ETFs can be bought and sold at market prices at any time during the trading day.

• Transparency: Holdings are disclosed daily, allowing investors to see exactly what assets they own.

• Passive Management: Most ETFs are designed to passively track specific indices, reducing the costs and complexities of active management.

• Active ETFs: Some ETFs are actively managed by advisors who allocate assets, attempting to outperform the market index.

• Core-Satellite Investing: Using ETFs as the ‘core’ of your portfolio for stable returns and complementing them with ‘satellite’ investments for potential growth.

• Strategic Asset Allocation: Utilizing ETFs to represent different asset classes, maintaining balance through periodic rebalancing.

ETFs offer a versatile investment option, suitable for both novice investors and experienced traders. They provide an efficient way to gain exposure to a wide array of assets, markets and investment strategies, making them a vital tool in modern investing.