Exchange Traded Funds (ETFs) are funds traded on public exchanges, meaning you can buy, sell, and trade them throughout the day, just like individual stocks.
Many ETFs are very similar to index funds, with a couple of key differences. Like index funds, ETFs hold all stocks or other assets within a public index. Unlike index funds, they’re traded on exchanges, usually making them cheaper and easier to buy and sell.
Benefits of ETFs
ETFs incur very low fees that won’t erode your returns, while offering diversification within a single financial product. They’re also quite efficient from a tax perspective: since they don’t involve a lot of active trading, they don’t often generate capital gains that are subject to taxation. Their liquidity may also be attractive in retirement, when unexpected costs may require you to cash them out.
Risks of ETFs
ETFs are generally only susceptible to a market-wide decrease that affects the entire index they’re tracking. However, not all ETFs work like index funds. Some are actively managed and may contain additional risk.
Some ETFs can be simple, passive, and elegant, while others can be very complex. Make sure you do your research before investing in one, and speak with a licensed professional to see if ETFs have a place in your responsible retirement plan.