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Author Bio Adam has been writing for The Motley Fool since covering consumer goods and technology companies. He consumes copious cups of coffee, and he loves alliteration. He spends about as much time thinking about Facebook and Twitter's businesses as he does using their products. For some lighthearted stock commentary and occasional St.
Louis Cardinals mania Follow admlvy. Join Stock Advisor Discounted offers are only available to new members. Retired: What Now? Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. New Ventures. Search Search:. Matthew Frankel, CFP. What is an ETF? ETFs vs. The Motley Fool. Understanding ETF basics Before we get any further, there are a few concepts that are important to know before you buy your first ETFs. Passive vs. Active ETFs hire portfolio managers to invest their money.
Expense ratios: ETFs charge fees, known as the expense ratio. All things being equal, a lower expense ratio will save you money. You can choose to have your ETF dividends paid to you as cash, or you can choose to have them automatically reinvested through a dividend reinvestment plan , or DRIP. How much money do you need to be able to invest in ETFs?
Image source: Getty Images. ETFs take the guesswork out of stock investing. ETFs are more liquid easy to buy and sell than mutual funds. Online brokers make it easy to buy or sell ETFs with a simple click of the mouse.
It can be extremely complicated to invest in individual bonds, but a bond ETF can make the fixed-income portion of your portfolio very easy. Stocks Stocks are investments in a company's future success. Bonds Just as borrowing money is a part of life for most people, companies and municipalities also borrow money by using bonds. Mutual Funds A low-cost, passive mutual fund can provide broad market exposure to diversify your investments. Between the higher expense ratios and the unlikelihood of beating the market over and over again, actively managed mutual funds often realize lower returns compared to ETFs over the long term.
An expense ratio indicates how much investors pay each year, as a percentage of the amount invested, to own a fund. Passively managed ETFs are relatively inexpensive. Some carry expense ratios as low as 0.
This is considerably lower than actively managed funds. In , the average annual expense ratio of actively managed funds was 0. Mutual fund fees investors need to know. Limited time offer. Terms apply. On the other hand, traditional mutual funds, even those based on an index, are priced and traded at the end of each trading day.
The stock-like trading structure of ETFs also means that when you buy or sell, you might have to pay a commission. However, this is becoming increasingly uncommon as more and more major brokerages do away with commissions on ETF, stock, or options trades. This can be important if the ETF is held within a taxable account and not within a tax-advantaged retirement account, such as an IRA or k. When an investor buys an ETF, you won't pay capital gains taxes unless the shares are eventually sold for a profit.
Mutual funds, on the other hand, are structured in a way that tends to incur higher capital gains taxes. However, ETFs can be purchased by the share, lowering the cost of establishing a position or adding to an existing one. In general, however, ETFs are an affordable option that gives investors broad market exposure, and they can still provide you with diversification.
Investing in ETFs means taking on that duty or outsourcing it to a financial advisor or robo-advisor. See our picks for the best brokers for funds.
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