A: Exchange traded funds (ETFs) are like mutual funds built on a stock index, except ETFs are actually a basket of securities that trade on a stock exchange. Among this new investment vehicle’s advantages are tax efficiency, accessibility, and pricing, because ETF prices are updated every minute the market is open, whereas an index fund is only priced once daily. ETFs also have lower expense ratios than index funds do. An index fund may have an international expense ratio around 18 basis points, but an ETF built around the same index would have between 9.5 and 12 basis points.
Another advantage of ETFs is that you have a low entry cost. Unlike index funds, ETFs allow you to buy just one share of the index; index funds require you to buy into the entire fund. For example, you can buy one share of the Dow Jones exchange traded fund for about $75 to $100.
Q: Do EXCHANGE TRADED FUNDS have any disadvantages?
A: ETFs are sold only through brokers, so you would have to pay a commission when you buy shares, unless you buy them through a managed account program. With an index fund, there is no sales charge and no redemption fee.