What is an ETF? | Fidelity

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In this video, learn more about what an ETF actually is, and how investing in ETFs can affect your portfolio. To learn more about ETFs, visit https://ift.tt/2mhecGt To get started investing with ETFs, visit https://ift.tt/2fo0BfE. To see more videos from Fidelity Investments, subscribe to: https://www.youtube.com/fidelityinvestments Facebook: https://ift.tt/1Ux3a8L Twitter: https://www.twitter.com/fidelity Google+: https://ift.tt/1OAPVDM LinkedIn: https://ift.tt/1Ux3a8M What is an exchange-traded fund? It’s simple, really. ETFs are baskets of securities designed to provide exposure to different areas of the market. If used correctly, ETFs may be powerful tools for building solid, well-diversified portfolios. If you want exposure to the S&P 500 Index, there’s an ETF for that. Brazilian equities? Corporate bonds? Municipal bonds? Commodities? Yes to all. Let’s look at three key attributes of ETFs. The first attribute is hinted at by the name: exchange-traded funds. ETFs trade throughout the day, like stocks, meaning you can buy or sell them any time the market is open. But intraday trading introduces new challenges and costs. As with stocks, you must pay a spread when you buy or sell an ETF. Unless an ETF is part of a commission-free trading program, you must pay a commission too. Be sure to pay attention to any short-term trading fees that may be incurred within a prescribed time frame when selling an ETF. And while most ETFs trade close to their net asset value, you’ll want to keep an eye on less liquid ETFs to make sure you’re getting a fair price, too. ETFs may trade at a price that is higher (premium) or lower (discount) to their net asset value. The second attribute is cost. Let’s review a few of the reasons ETFs can be a cost efficient investment. For starters, most ETFs are index funds, which means they track the returns of a market index and are passively managed. This type of passively managed product tends to be less expensive than an actively managed product. Secondly, the ETF structure itself provides cost advantages: recordkeeping, transfer agent and other fees may be lower for ETFs than for traditional mutual funds. ETF companies may pass some of these savings along to you, the investor. Remember, though, to consider the costs of trading the ETF before you buy. Just because it has a lower headline expense ratio does not necessarily mean it’s cheaper to own when you consider other costs. The third attribute is tax efficiency. One of the ways that ETFs have the potential to be tax efficient is because there are typically fewer taxable events in an ETF. For example, if you own shares of an ETF, and another shareholder decides to sell some of his shares, that shareholder simply sells the shares to another investor…very similar to selling a stock. In this scenario, there would generally be no capital gains transactions for the other shareholders of the ETF. Keep in mind, the tax treatment from one ETF to another can differ and you should always be sure to read the prospectus for specific details. One last hint when considering ETFs: Be careful when selecting which ETF to buy. While many ETFs sound similar, they don’t always provide the same exposure. Two different biotech ETFs, for instance, can hold very different stocks, and their annual performance can vary quite a bit. Like any investment, you have to do your research and make sure you know what you’re buying. Remember, ETFs are another tool in your investing toolbox, and like any tool, the more you understand how to use them, the more effectively you can put them to work. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, Rhode Island, 02917 723245.2.0
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