what are ETFs?

In March 2008, a survey of investment professionals found that 67% called ETFs the most innovative investment vehicle of the last two decades, and 60% reported that ETFs have fundamentally changed the way they construct investment portfolios.¹

The reason is simple: ETFs combine the benefits of stocks and mutual funds into one investment vehicle. Like owning individual stocks, ETFs can be traded throughout the day on a stock exchange. And like mutual funds, ETFS are bundles of stocks. But while mutual fund managers try to guess the best mix of stocks (and charge you a fee for doing so), ETFs are simply comprised of all the stocks in a specific index like the S&P 500 or the Dow Jones. So you don’t pay for the mutual fund manager’s guessing game. In the end, you get a smarter, more efficient way to invest:

• Tax-advantaged. Mutual fund managers are buying and selling stocks in your mutual fund trying to beat an index. Every time they sell and incur a capital gain, you get hit with the tax for that gain. With ETFs, you only pay capital gains tax when you sell your shares.
• Low costs. The average yearly expense that mutual funds charge you is approximately 1.67% of your total investment. Since ETFs are not paying high-priced mutual fund managers, the yearly expense is only 0.40%.
• Transparent. Mutual funds only disclose their holdings two times a year, so it’s hard to see if your strategy is on track. ETFs are required to make their holdings available every day, so you know exactly what you own.

¹State Street Global Advisors and Knowledge@Wharton, ETFs Changing the Way Advisors Do Business, According to State Street and Wharton Study, Business Wire (June 10, 2008).