One of the most basic types of investment funds is a mutual fund, a managed portfolio or pool of stocks, bonds and other securities that investors can buy shares in. Exchange-traded funds are taking this concept to the next level.
What are exchange-traded funds?
An exchange-traded index fund (ETF) is similar to a mutual fund, except that it is passively managed. An ETF includes a large collection of securities and often directly replicates the performance of an underlying index. ETFs offer individual investors easy and convenient access to entering the market. If an ETF tracks an index, the fund will develop like the index. This may obviously also be a disadvantage, as it can never (significantly) outperform the index.
When investing in ETFs, you have the choice between “distributing ETFs”, which regularly distribute income from securities, and “accumulating ETFs”, which reinvest your dividends in more securities, allowing you to profit from compounding.
Since there is relatively little active fund management involved in ETFs, expenses and fees for investors are often lower than for mutual funds that entail extensive fund management. The diversity of assets in the portfolio of an ETF portfolio and the relatively small amount of capital that first-time investors need to get started make ETFs an attractive investment vehicle.
