Why choose an ETF?

You may have heard about exchange-traded funds (ETFs), a relatively new type of investment that may offer built-in diversification similar to a mutual fund. ETFs have certain advantages, but as with any other investment type, it’s important to understand what they are and how they work before investing in them.

An ETF is like an index mutual fund that trades like a stock. When you own an ETF, you own a single security that represents a basket of stocks, which tracks an index and fluctuates with the value of the underlying stocks.

How does it differ from an index mutual fund?

The main difference between an ETF and an index fund is the way you trade shares. For example:

• With a mutual fund, your order to buy or sell shares is processed at the end of the day, and unless there is a load or transaction fee, there is no cost for the trade.
• With an ETF, you can buy or sell shares at any time during the trading day (like a stock), but you pay a commission for each purchase or sale, just like any stock trade.