How is an ETF different from a stock?
The biggest difference between ETFs and stocks is that a stock represents ownership in a single company, whereas an exchange-traded fund is a collection of investable assets and securities, including stocks and bonds. Both can be bought and sold during the day when the stock market is open.
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, an ETF is your best choice.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
ETFs tend to be less volatile than individual stocks, meaning your investment won't swing in value as much. The best ETFs have low expense ratios, the fund's cost as a percentage of your investment. The best may charge only a few dollars annually for every $10,000 invested.
ETFs may close due to lack of investor interest or poor returns. For investors, the easiest way to exit an ETF investment is to sell it on the open market. Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF.
ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees.
The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.
For most standard, unleveraged ETFs that track an index, the maximum you can theoretically lose is the amount you invested, driving your investment value to zero. However, it's rare for broad-market ETFs to go to zero unless the entire market or sector it tracks collapses entirely.
All investments have a risk rating ranging from low to high. An ETF with a low risk rating can still lose money. ETFs do not provide any guarantees of future performance. As with any investment, you might not get back the money you invested.
Symbol | Name | 5-Year Return |
---|---|---|
SOXX | iShares Semiconductor ETF | 25.18% |
FBGX | UBS AG FI Enhanced Large Cap Growth ETN | 23.78% |
ITB | iShares U.S. Home Construction ETF | 23.56% |
SOXL | Direxion Daily Semiconductor Bull 3x Shares | 22.55% |
What do you actually own when you buy an ETF?
There is no transfer of ownership because investors buy a share of the fund, which owns the shares of the underlying companies. Unlike mutual funds, ETF share prices are determined throughout the day. A mutual fund trades only once a day after market close.
For most individual investors, ETFs represent an ideal type of asset with which to build a diversified portfolio. In addition, ETFs tend to have much lower expense ratios compared to actively managed funds, can be more tax-efficient, and offer the option to immediately reinvest dividends.
ETF issuers collect any dividends paid by the companies whose stocks are held in the fund, and they then pay those dividends to their shareholders. They may pay the money directly to the shareholders, or reinvest it in the fund.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
Hold ETFs throughout your working life. Hold ETFs as long as you can, give compound interest time to work for you. Sell ETFs to fund your retirement. Don't sell ETFs during a market crash.
1. Vanguard S&P 500 ETF (VOO -0.07%) Legendary investor Warren Buffett has said that the best investment the average American can make is a low-cost S&P 500 index fund like the Vanguard S&P 500 ETF.
ETF | Assets Under Management | Expense Ratio |
---|---|---|
Invesco QQQ Trust (QQQ) | $259 billion | 0.20% |
Vanguard High Dividend Yield ETF (VYM) | $55 billion | 0.06% |
Vanguard Total International Stock ETF (VXUS) | $69 billion | 0.08% |
Vanguard Total World Stock ETF (VT) | $35 billion | 0.07% |
- Nippon India ETF Nifty 50 BeES. ₹ 241.63.
- Nippon India ETF PSU Bank BeES. ₹ 76.03.
- BHARAT 22 ETF. ₹ 96.10.
- Mirae Asset NYSE FANG+ ETF. ₹ 84.5.
- UTI S&P BSE Sensex ETF. ₹ 781.
- Nippon India ETF Gold BeES. ₹ 55.5.
- Nippon India Etf Nifty Bank Bees. ₹ 471.9.
- HDFC Nifty50 Value 20 ETF. ₹ 123.2.
ETFs are bought and sold just like stocks (through a brokerage house, either by phone or online), and their price can change from second to second. Mutual fund orders can be made during the day, but the actual trade doesn't occur until after the markets close.
Do you pay taxes on ETFs if you don't sell?
At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
ETFs. Investment funds are a strategic option during a recession because they have built-in diversification, minimizing volatility compared to individual stocks. However, the fees can get expensive for certain types of actively managed funds.
Since they maintain a fixed level of leverage, 3x ETFs eventually face complete collapse if the underlying index declines more than 33% on a single day. Even if none of these potential disasters occur, 3x ETFs have high fees that add up to significant losses in the long run.
"Leveraged and inverse funds generally aren't meant to be held for longer than a day, and some types of leveraged and inverse ETFs tend to lose the majority of their value over time," Emily says.
References
- https://www.barrons.com/articles/why-investors-are-pulling-money-from-vanguards-index-funds-51603390832
- https://www.cnn.com/cnn-underscored/money/best-mutual-funds
- https://www.investopedia.com/articles/investing/020116/when-right-time-change-mutual-funds-etfs.asp
- https://www.thehartford.com/business-insurance/strategy/business-financing/equity-financing
- https://www.etf.com/sections/etf-basics/bond-etf-taxation-3-things-you-need-know
- https://www.sec.gov/about/reports-publications/investor-publications/introduction-mutual-funds
- https://www.empower.com/the-currency/life/individual-bonds-vs-bond-etfs
- https://www.bankrate.com/investing/mutual-fund-vs-etf-which-is-better/
- https://www.schwab.com/learn/story/etf-vs-mutual-fund-it-depends-on-your-strategy
- https://www.forbes.com/advisor/investing/best-balanced-etfs/
- https://www.investopedia.com/articles/mutualfund/07/etf_downside.asp
- https://www.blackrock.com/sg/en/ishares/education/types-of-etfs
- https://www.getsmarteraboutmoney.ca/learning-path/etfs/how-exchange-traded-funds-etfs-work/
- https://www.vanguard.ca/en/investor/learn/featured-group/basics/what-are-etfs
- https://www.investopedia.com/articles/etfs-mutual-funds/061416/biggest-etf-risks.asp
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp
- https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/funds/exchange-traded-funds-for-dummies-cheat-sheet-208448/
- https://investor.vanguard.com/investor-resources-education/etfs/etf-vs-mutual-fund
- https://www.fidelity.com/learning-center/investment-products/etf/benefits-of-etfs
- https://www.schwab.com/etfs/understand-etfs
- https://www.trackinsight.com/en/education/what-are-fixed-income-etfs
- https://www.fidelity.com/learning-center/investment-products/etf/risks-with-etfs
- https://www.investopedia.com/articles/investing/111115/5-reasons-choose-mutual-funds-over-etfs.asp
- https://www.fidelity.com/learning-center/investment-products/etf/drawbacks-of-etfs
- https://www.schwab.com/learn/story/primer-on-wash-sales
- https://www.schwab.com/learn/story/3-ways-to-build-all-etf-portfolio
- https://www.kiplinger.com/investing/etfs/best-etfs-to-buy
- https://investor.vanguard.com/investor-resources-education/taxes/how-mutual-funds-etfs-are-taxed
- https://www.morningstar.ca/ca/news/185716/should-you-hold-bonds-through-mutual-funds-etfs-or-directly.aspx
- https://money.usnews.com/investing/articles/best-etfs-to-buy-for-long-term-investors
- https://www.investopedia.com/articles/stocks/09/buying-stock-or-etf.asp
- https://testbook.com/key-differences/difference-between-debt-and-equity
- https://www.investopedia.com/ask/answers/09/mutual-fund-etf.asp
- https://money.usnews.com/investing/articles/best-bond-etfs-to-buy-now
- https://www.investopedia.com/ask/answers/how-can-i-buy-sp-500-fund/
- https://www.investopedia.com/articles/investing/102915/why-are-etf-fees-lower-mutual-funds.asp
- https://www.quora.com/Will-the-price-of-a-leveraged-ETF-ever-go-negative-What-happens-if-I-invest-100-into-a-3X-leveraged-S-P-500-ETF-over-a-period-of-time-that-sees-a-40-drop-in-value-of-the-S-P-500-Index
- https://www.shortform.com/blog/warren-buffett-on-derivatives/
- https://www.investopedia.com/articles/investing/020916/etfs-can-be-safe-investments-if-used-correctly.asp
- https://www.blackrock.com/us/individual/literature/fact-sheet/sma-target-allocation-70-30-etf-factsheet.pdf
- https://www.investopedia.com/articles/investing/120415/how-dividendpaying-etfs-work.asp
- https://www.etf.com/sections/etf-basics/most-popular-etfs-aum
- https://www.etf.com/sections/etf-basics/what-are-different-types-etfs
- https://www.titan.com/articles/etf-drawbacks
- https://www.fool.com/investing/stock-market/basics/buy-and-sell-stock-same-day/
- https://www.etf.com/sections/etf-basics/why-do-leveraged-etfs-decay
- https://www.schwab.com/learn/story/what-are-different-types-investment-securities
- https://www.investopedia.com/terms/e/etf.asp
- https://fortune.com/recommends/investing/investing-during-a-recession/
- https://www.nerdwallet.com/article/investing/best-etfs
- https://www.fool.com/investing/how-to-invest/index-funds/safest-index-funds/
- https://www.investopedia.com/terms/b/bond-etf.asp
- https://etfdb.com/compare/highest-5-year-returns/
- https://www.smartaboutmoney.co.za/saving-and-investing/exchange-traded-funds/how-quickly-can-i-get-my-money-out-of-an-etf/
- https://www.investopedia.com/ask/answers/102815/are-etfs-considered-derivatives.asp
- https://www.fool.com/investing/how-to-invest/etfs/
- https://www.nerdwallet.com/article/investing/how-to-invest-in-etf-exchange-traded-fund
- https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx
- https://www.trackinsight.com/en/education/how-many-etfs-should-you-own
- https://www.experian.com/blogs/ask-experian/pros-and-cons-of-investing-in-etfs/
- https://curvo.eu/article/etf-risk
- https://www.vanguard.com.au/personal/learn/smart-investing/etfs/etfs-how-to-get-started
- https://www.utimf.com/articles/advantages-disadvantages-of-investing-in-exchange-traded-funds
- https://lakshmishree.com/blog/15-best-etfs-in-india-to-invest-in-2024/
- https://www.investopedia.com/articles/exchangetradedfunds/09/etf-out-of-business.asp
- https://www.investopedia.com/articles/exchangetradedfunds/11/advantages-disadvantages-etfs.asp
- https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp
- https://www.morningstar.com/etfs/etfs-2023-tale-success-failure
- https://www.thestreet.com/etffocus/trade-ideas/the-only-leveraged-etf-that-i-would-buy-hold-long-term
- https://groww.in/p/exchange-traded-funds
- https://investor.vanguard.com/investor-resources-education/retirement/income-make-the-most-of-retirement
- https://www.schwab.com/learn/story/what-happens-if-your-etf-closes
- https://www.securities-administrators.ca/investor-tools/understanding-your-investments/etf-facts/
- https://www.etf.com/topics/aggressive
- https://www.investopedia.com/articles/investing/121515/why-3x-etfs-are-riskier-you-think.asp
- https://www.bankrate.com/investing/best-etfs/
- https://www.etfcentral.com/etf-u/guides/how-many-etfs-should-i-own
- https://www.kotaksecurities.com/mutual-funds/difference-between-debt-and-equity-fund/
- https://www.nerdwallet.com/reviews/investing/brokers/vanguard
- https://www.icicidirect.com/idirectcontent/Home/StaticData/WeOfferETFUnderstanding.html
- https://www.futurelearn.com/info/courses/risk-management/0/steps/39267
- https://business.gov.au/finance/funding/choose-your-funding
- https://www.bankrate.com/investing/stocks-vs-etfs/
- https://www.investopedia.com/why-bond-etfs-go-down-8303231
- https://www.etf.com/etf-education-center/etf-basics/what-risks-are-there-in-etfs
- https://www.canstar.com.au/investor-hub/buy-sell-hold-etfs/
- https://www.investopedia.com/ask/answers/021615/what-safest-investment.asp
- https://www.etftrends.com/etf-education-channel/dont-be-afraid-to-buy-at-the-highs/
- https://www.fidelity.com/learning-center/investment-products/etf/which-is-right-for-you