Smart investors are moving into exchange - traded funds – are you? Exchange - traded funds are characteristically viewed as a hybrid of an open – ended mutual fund and a trading stock. Similar to mutual funds, ETF’s represent a fractional ownership in an underlying portfolio of securities that track a specific index. ETF’s are different from mutual funds in that they are continually priced throughout the trading day, and are used to manage risk using limit and market orders.

An investor can buy an ETF in hopes it will go up or, sell them short and make money as the tracking index or commodity goes down. Another available option is to purchase inverse ETF’s, also acknowledged as ETF shorts, which provide the opposite performance of the benchmark that it tracks. Further discussion on this unique ETF will follow in future articles.

A benefit of having exchanged traded funds in your portfolio is that they tend to have lower expense ratios then most mutual funds. This is primarily because there aren’t any operational and research costs that are associated with all actively managed funds. Another major advantage in investing in ETF’s is that they are less likely to make taxable capital gain distributions opposed to actively managed funds. Exchange-traded funds are an integral part of any investor’s portfolio here at Capital Management Group.