Define the ETF
As it name suggests, Exchange Traded Funds, or ETFs are a portfolio of securities that traded on a stock exchange. It is traded like stocks, but more resemble index mutual funds, with much lower cost and tax efficiency.
Why we need ETFs?
Investors are already inundated with all kinds of investment products from bonds, stocks, to mutual funds and income trusts. So why on earth do we need the ETF?
Over the last couple of years since the burst of the tech bubble, investors have learned some valuable lessons in a hard way. The need for lower investment cost and portfolio diversification are becoming a general belief. Index mutual funds have become very popular, because they provide low cost, diversified portfolio, and tax efficiency. ETF is invented to emulate the index fund, and are in many ways, surpass it.
- Trading flexibility like a stock
- Unlike mutual funds, ETFs are trading on the stock exchange exactly the same way as stocks.
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Transparency and visibility
- The holding structure, costs, distribution policy are all readily available to investors on the open market. The price of ETFs are quoted on the exchange in real-time.
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Tax Efficiency
- Unlike mutual funds, ETFs are less likely to generate taxable capital gains distributions. As an index investment, ETFs tend to experience lower portfolio turnover, thus less likely to realize capital gains.
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