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9 Things You Must Know About ETFs

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There’s no question that exchange-traded funds are becoming a big part of the investor’s toolkit. Assets in ETFs and similar exchange-traded products are now approaching $2 trillion, nearly 10 times what they were a decade ago, according to the Investment Company Institute, the fund industry’s trade group.

But as commonplace as ETFs are now, they can still be confusing. Their structure is a hybrid of investing ideas: Like index mutual funds, most ETFs own a basket of stocks, bonds or other assets that mimic a benchmark, such as Standard & Poor’s 500-stock index. But like stocks, ETF shares trade throughout the day on an exchange. And as the industry has grown, so has the variety of exchange-traded products available. Some ETFs try to enhance return by using leverage or by betting against the direction of the market. So-called exchange-traded notes don’t invest in stocks or bonds at all; rather, they are bank-issued debt. Other exchange-traded products are actually trusts, which often buy physical commodities, such as gold or silver.

Knowing some of the basics of how exchange-traded products work will go a long way toward helping you select the right ones for your portfolio.

All data is as of October 3.

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