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Understanding ETFs and Why They Beat Mutual Funds

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Jeffrey Feldman and Andrew Hyman explain why ETFs are the ideal low-cost tool for an investor who wants to take charge of her portfolio.
This chapter is from the book

Is there a low-cost, simple, easy to use, investment tool for buying into the trends of the future? Yes. It is the exchange traded fund, more popularly known as the ETF. An ETF is a security that trades on a stock exchange, made up of a basket of securities that track a particular index, such as the Dow Jones Industrial Average, or the S&P 500.1 ETFs can track the performance of a particular group of stocks, including those in sectors, such as healthcare, green industry, and infrastructure. These funds allow investors to buy into an industry without the worries of buying a single stock. Unlike mutual funds, ETFs trade continuously throughout the day on an exchange, as does any listed security. In addition, their cost efficiency, compared to other investment strategies, makes them the ideal low-cost tool for an investor who wants to take charge of her portfolio.

What Is an ETF?

An ETF is a security that tracks the performance of an index by holding, with the same weights as in the index, the securities comprising the index.2 An investor who buys 100 shares of an ETF based on the S&P 500, will own a basket underlain by the shares of the companies in the S&P 500 in proportion to their weights in the index.

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