The world of investing is filled with enough jargon to make your head spin. So I’ve decide to help clear some fog on one of my favorite investment vehicles, ETFs.
An ETF, or “exchange traded fund,” is a portfolio of stocks or bonds designed to track the performance of a specific index. It trades on an exchange, just like a stock, and provides diversification, like a mutual fund. But an ETF’s low-cost structure and enviable tax efficiency makes it a unique and useful tool for portfolio construction.
By combining different ETFs, investors can maintain a personalized mix of stocks and bonds, domestic and international offerings, as well as take advantage of specific economic sectors.
Since their debut in 1993, ETFs now number over 779 and hold nearly $691 million in assets. Though still a fraction the size of the $7.3 billion mutual fund industry, ETFs are a proven investment vehicle whose time has come.
ETFs can provide great versatility to any investment plan. A portfolio can be entirely created using ETFs, or they can be used in a portfolio of individual stocks to provide diversified exposure to specific sectors. Like any investment, however, ETFs should be carefully researched. While two ETFs might invest in the same broad index, their approach and fee structure can create differing returns.
Once thought of as a passing fad, ETFs have become a mainstay of our investment alphabet soup.
D. DRUMMOND OSBORN, CFP is a Certified Financial Planning practitioner and Director of Wealth Management at OSBORN Wealth Management, where he focuses on investment management, financial advice and retirement planning services. Visit him on the Web at www.osbornwealthmanagement or e-mail your questions to Drummond@osbornwealthmanagement.com.
