Exchange Traded Funds (ETFs) provide a great way for individual investors to build completely diversified portfolios using only a handful of positions. The power of ETFs comes from the fact that these instruments combine the best of the stock and mutual fund worlds. Like stocks, ETFs have a ticker and can be bought on sold in real-time on any discount brokerage platform. Like mutual funds, ETFs are diversified funds that may own hundreds of stocks or bonds. It is common for ETFs to track the performance of a broad index like the S&P 500, a measure of the US market.
The most intelligently conceived asset-allocation does little good unless it is actually implemented somewhere in an investor's portfolio. In the past, investors had to go to mutual funds to implement a diversified asset allocation. But today, they have a great new option in the form of exchanged traded funds, or ETFs as they are ubiquitously known.
ETFs have become the cool new kids on the block in the financial world lately - and with good reason. They can be great instruments for individual investors to get low-cost exposure to the markets. This article will look at what ETFs are, how they are classified, and what you should consider in picking one.