What is an ETF? Pros, Cons, and Risks

What is an exchange traded fund (ETF)?

An exchange-traded fund (ETF) is an investment vehicle that allows an investor to buy a bundle of securities such as stocks or bonds at once. ETFs trade on exchanges, meaning the price of ETF shares fluctuates all day as the ETF is bought and sold. ETFs typically have a lower expense ratio and fewer broker commissions than buying the securities individually. ETFs can contain all types of investments, including stocks, commodities, or bonds, and some offer US-only holdings while others are international. ETFs provide a way to diversify portfolios and reduce risk while potentially helping to increase returns.

How do ETFs work?

ETFs are a great way to diversify your investments and take advantage of the stock market. Here’s a step-by-step guide for how ETFs work:

ETF providers create a basket of stocks, bonds, commodities or currencies, which is known as an ETF.
Investors buy shares of the ETF, just like buying shares of a company.
Investors then trade these ETFs on exchanges, such as the NYSE and Nasdaq, throughout the day.
The ETFs’ performance is determined by the performance of their underlying investments.
ETFs are usually low-cost investments, and they allow investors to access a broad range of asset classes.
ETFs are typically more liquid (easy to buy and sell) than mutual funds, making them a popular choice for investors.
Finally, investors can receive dividends or other benefits from ETFs, even though they don’t own the underlying assets.

What are the major types of ETFs?

1. Stock ETFs

The major types of stock ETFs include index-stock ETFs, industry-focused ETFs, and strategy ETFs. Index-stock ETFs provide investors with the diversification of an index fund and the ability to buy and sell as little as one share. These ETFs track well-known market indexes like the S&P 500. Industry-focused ETFs provide exposure to a single industry, such as automotive or foreign stocks. These ETFs contain a collection of stocks and bonds, with the aim of providing diversified exposure to the industry and potential for growth. Finally, strategy ETFs allow investors to match the overall performance of the market over time. These ETFs provide exposure to a variety of stocks, bonds, and other assets, with the potential for minimal expense.

2. Bond ETFs

The major features of bond ETFs are:

They provide regular income to investors and their income distribution depends on the performance of underlying bonds.
They might include government bonds, corporate bonds, and state and local bonds (called municipal bonds).
Unlike their underlying instruments, bond ETFs do not have a maturity date and generally trade at a premium or discount from the actual bond price.
They provide exposure to a variety of stocks, bonds, and other assets, typically at a minimal expense.
ETFs take the guesswork out of stock investing and make it easy to match the market’s performance over time.
ETFs are more liquid (easy to buy and sell) than mutual funds.
Investing in ETFs offers benefits you may not get from trading individual stocks or bonds on your own.
You can buy ETFs that track specific industries or strategies.

3. Commodity ETFs

There are three major types of commodity ETFs: those that invest in physical commodities, those that invest in futures contracts, and those that track commodity indices.

Physical commodity ETFs purchase and hold the physical commodity, such as gold or oil, in warehouses and storage facilities. These ETFs provide investors with direct exposure to the prices of these commodities.

Futures-based commodity ETFs purchase futures contracts, rather than physical commodities, to provide exposure to commodities. These ETFs offer investors the advantage of gaining exposure to commodities without the storage and insurance costs associated with purchasing and storing physical commodities. However, these ETFs are subject to the risks associated with futures markets, such as the cost to roll.

Commodity index ETFs are designed to track the performance of a particular index, such as the Bloomberg Commodity Index or the Dow Jones-UBS Commodity Index. These funds provide investors with a diversified portfolio, allowing them to gain exposure to all the commodities listed in the index, rather than relying on a single commodity.

4. Currency ETFs

The major types of currency ETFs are index ETFs, commodity ETFs, currency ETFs, actively managed ETFs, inverse ETFs, leveraged ETFs, and thematic ETFs.

Index ETFs are funds that track a particular index, such as the S&P 500. They include a variety of asset classes and offer diversification benefits. Commodity ETFs provide exposure to a particular commodity, such as gold. Currency ETFs allow investors to invest in or short any major currency or a basket of currencies. They are issued by Invesco and Deutsche Bank among others. Actively managed ETFs are managed by a professional fund manager who seeks to outperform a benchmark. Inverse ETFs are designed to move opposite of the underlying index. Leveraged ETFs are designed to provide multiples of exposure to an underlying index. Thematic ETFs focus on a particular theme or sector, such as biotech or clean energy.

5. Mix ETFs

Mix ETFs are a type of exchange-traded fund (ETF) that combine the diversification of mutual funds with lower investment minimums and real-time pricing. Unlike traditional mutual funds, ETFs are traded on stock exchanges and can be bought and sold throughout the day. ETFs are composed of a variety of different asset classes, such as domestic and international stocks, bonds, and commodities, so they can provide a wide range of diversification with just one purchase. Moreover, ETFs have the added benefit of lower expense ratios and cost-effective trading, making them a cost-effective way to diversify your portfolio. When compared to other types of investments, ETFs offer flexibility and control over cost, diversification, and liquidity.

6. Inverse ETFs

Inverse ETFs are a type of investment that seeks to profit from a decline in the value of the underlying benchmark or index. They differ from regular ETFs in that they use derivatives, such as equity swaps and futures contracts, to short the stock and attempt to gain a proportionate amount when the market declines. Leveraged ETFs are a type of inverse ETF that attempt to achieve returns that are a multiple of the returns of the corresponding index, such as 2x or 3x the daily index return. These ETFs use financial engineering techniques, such as rebalancing and re-indexing, to achieve these results. Investors should be aware that many inverse ETFs are actually Exchange-Traded Notes (ETNs) and not true ETFs, and should consult their broker to determine if an ETN is suitable for their portfolio.

7. Leveraged ETFs

A leveraged ETF is an exchange-traded fund (ETF) that seeks to deliver a multiple of the return of an underlying index or asset. The leveraged ETF utilizes derivatives such as options or futures contracts to amplify its returns. Leveraged ETFs offer investors the opportunity to gain exposure to an index with a leveraged return, such as 2x or 3x the daily index return. There are also leveraged inverse ETFs, which seek an inverse multiplied return.

The leveraged ETFs attempt to achieve daily returns that are a multiple of the returns of the corresponding index, such as the S&P 500 or the Dow Jones Industrial Average. Leveraged Bull ETF funds might aim for daily returns that are 2x or 3x those of the Dow Jones or S&P 500, while Leveraged Inverse ETFs might attempt to achieve returns that are -2x or -3x of the daily index return. To achieve these returns, financial engineering techniques such as equity swaps, derivatives, futures contracts, rebalancing, and re-indexing are utilized.

The rebalancing and re-indexing of these ETFs can have considerable costs when markets are volatile. The rebalancing problem is that the fund manager incurs trading losses because he needs to buy when the index goes up and sell when the index goes down in order to maintain a fixed leverage ratio. The re-indexing problem of leveraged ETFs stems from the arithmetic effect of volatility of the underlying index. Option pricing of leveraged ETFs also depend on the realized variance of the underlying index.

8. Alternative ETFs

Alternative ETFs come in a variety of shapes and sizes, allowing investors to gain exposure to virtually any market in the world or any industry sector. The major types of alternative ETFs include:

Stock Index ETFs: These ETFs track specific stock indices and are designed to match or beat the performance of the underlying index. They offer exposure to a wide range of stocks, including domestic and international markets.
Bond ETFs: Bond ETFs allow investors to diversify their portfolios by investing in a variety of bonds, such as Treasury bonds, corporate bonds, municipal bonds, and more. They are a cost-effective way to gain broad exposure to various bond markets.
Commodity ETFs: Commodity ETFs provide investors with exposure to commodities like gold, silver, oil, and other physical goods. These ETFs are designed to track the spot price of a commodity, allowing investors to gain exposure to a particular commodity without the need for actually owning the physical asset.
Emerging Market ETFs: Emerging market ETFs invest in stocks from developing countries in regions such as Asia, Latin America, and Africa. These ETFs are designed to track the performance of emerging markets, giving investors the potential to capitalize on the growth of these markets.
Alternative Assets ETFs: Alternative assets ETFs provide investors with exposure to a variety of asset classes, such as real estate, private equity, and infrastructure. These ETFs are designed to track the performance of alternative investments, allowing investors to gain access to investments that may have been previously difficult to access.

9. Emerging Market ETFs

There are several major types of emerging market ETFs to choose from. These include:

Country ETFs: These ETFs focus on investments in a single country or region and offer investors exposure to the economy, stock market, and currency of that market.
Regional ETFs: Regional ETFs provide exposure to multiple countries within a single region, such as the Asia Pacific or Latin America.
Industry ETFs: These ETFs focus on specific industries or sectors, such as energy, health care, technology, or financials.
Strategy ETFs: Strategy ETFs track specific strategies, such as dividend investing, or funds that focus on companies with socially responsible investments.
Currency-Hedged ETFs: These ETFs hedge against any changes in the exchange rate of the underlying currency, offering protection from a strong or weak dollar.

How is an ETF different from an index fund?

ETFs and index funds are both types of mutual funds that track an index. The main difference between them is how they are bought and sold. ETFs are traded like stocks on exchanges, while index funds are purchased in set dollar amounts and traded only at the close of each trading day.

The characteristics of ETFs compared to index funds include liquidity, cost-effectiveness, and passive management. ETFs are more liquid than index funds since they can be purchased throughout the day on a stock exchange. They are also more cost-effective since ETFs charge an expense ratio that is usually lower than that of index funds. ETFs are also passively managed, meaning that the fund holds a predetermined set of securities based on an index.

The pros of ETFs are that they can provide investors with the ability to buy and sell shares during the day, potentially reducing their risk and exposure, and helping to diversify their portfolios. The cost-effectiveness of ETFs can also be beneficial for investors.

The cons of ETFs compared to index funds include a lack of personal advice and guidance from experts, and the fact that they can be more volatile than index funds. Additionally, ETFs can be more difficult to understand than index funds since they are traded on exchanges and their prices can fluctuate throughout the day.

How do I invest in ETFs?

Step 1: Open a brokerage account

How do I open a brokerage account to invest in ETFs?

Choose a brokerage account: You’ll need a brokerage account before you can buy or sell ETFs. The majority of online brokers now offer commission-free stock and ETF trades, so cost isn’t a major consideration. Compare each broker’s features and platform to find the best one for you. If you’re a new investor, it might be a good idea to choose a broker that offers an extensive range of educational features, such as TD Ameritrade (NASDAQ: AMTD), E*Trade (NASDAQ: ETFC), or Schwab (NYSE: SCHW).
Open an account: Once you’ve chosen a broker, use their trading function to open a brokerage account. If you need help, you can work with a robo-advisor or a traditional financial advisor.

Step 2: Choose your first ETFs

Place your trade: After you open an account, you can invest in ETFs from there. Using your broker’s trading function, navigate to the particular ETF you’d like to buy and place the trade. Make sure you double-check your order before you make it official.

Step 3: Let your ETFs do the hard work for you

Letting your ETFs do the hard work can help you invest by removing the need to constantly monitor the market and make emotional, knee-jerk reactions to major market moves. This approach allows you to take advantage of the long-term growth potential of ETFs, as they are generally designed to be maintenance-free investments. ETFs also offer benefits like access to a wide variety of asset classes, low fees, and tax efficiency. All of these advantages can help you build a strong, diversified portfolio with minimal effort.

Step 4: Hold onto your ETFs

How long you should hold onto your ETFs depends on your investment strategy, but if you are investing for retirement, it is often a waiting game. The longer you hold onto an ETF, the more your interest will accrue through the power of compound interest. Additionally, if you have a long-term investment timeline, you will likely be able to ride out the highs and lows of the stock market as it trends upward over time. Investing in ETFs is a low-maintenance option and should be treated as such; over-trading can lead to underperformance, so it is best to let your ETFs do the work for you. By opening a brokerage account, choosing your ETFs, and letting them do the hard work, you will be able to reap the benefits of ETF investing

What are the pros and cons of investing in an ETF?

1. Pros

Investing in Exchange Traded Funds (ETFs) offers a number of benefits to investors. ETFs offer a wide range of investment choices, making it easy to gain exposure to specific industries or sectors. They also allow for instant diversification, which can reduce risk. ETFs are often cheaper than mutual funds or other investments, and with many brokers offering commission-free ETFs, it’s easy to get started with a small investment. Additionally, ETFs are more tax-efficient than some other investments and come with lower minimum investments. Finally, ETFs allow investors to target specific investing themes, allowing for more focused investments. All in all, ETFs are an affordable, tax-efficient and convenient way to access a broad range of asset classes.

Is easy to invest in

Investing in an ETF is a great way to get exposure to a variety of stocks, bonds, and other assets at a minimal expense. With the right guidance and platforms, it’s easy to buy and sell ETFs just like stocks. Here are the steps you need to take to begin investing in ETFs:

Low fees

The fees associated with ETFs can be a major factor in deciding whether or not to invest in them. As ETFs typically have low expense ratios and fewer broker commissions, investors benefit from lower average costs. Additionally, ETFs offer risk management through diversification, as well as access to many stocks across various industries. However, actively managed ETFs tend to have higher fees than passive ETFs, which can limit return potential. Furthermore, single-industry-focused ETFs limit diversification, and lack of liquidity can hinder transactions. In order to minimize the cost of investing in ETFs, it is important for investors to research the ETFs they are interested in, and take into account the expense ratios, broker commissions and SEC fees.

Can be traded online

Step 1: Open an account with a reputable broker. Online brokers like TD Ameritrade (NASDAQ:AMTD), E*Trade (NASDAQ:ETFC), or Schwab (NYSE:SCHW) are great options as they offer commission-free stock and ETF trades. Compare the features and platforms of different brokers to choose the one that best fits your needs.

Step 2: Choose the ETFs you want to purchase. ETFs are available on most online investing platforms, retirement account provider sites, and investing apps like Robinhood. Look for ETFs that track specific industries or strategies, and that have low fees and good returns.

Step 3: Place your order. Once you have chosen the ETFs you wish to purchase, you can place your order on the online broker platform you have chosen. Make sure to select the option for “commission-free” stock and ETF trades.

Step 4: Monitor your investments. After you have placed your order, monitor your investments regularly to ensure you are getting the returns you are expecting. If you need to, you can also quickly buy or sell ETFs just like stocks. Keep in mind that trading during the overnight session carries unique and additional risks, such as lower liquidity, higher price volatility, and may not be appropriate for all investors.

Can be held in a taxable account

Yes, it is possible to hold an ETF in a taxable account. ETFs can be owned in a number of different types of accounts, such as tax-advantaged accounts, such as retirement accounts, or brokerage accounts. However, it is important to note that any gains you make from selling an ETF will be taxed according to capital gains tax rules, and any dividends you receive will likely be taxable as well. It is also important to understand the tax implications of any investment product you’re considering, and to consult a tax professional if you’re uncertain about how you might be affected.

Can be sold at any time

Step 1: Open an account with a stock exchange.

Step 2: Locate the desired ETF and research its current price.

Step 3: Place an order to sell the ETF. This can be done online or over the phone.

Step 4: Select the type of order you would like to place. Orders can be placed as market orders, limit orders, stop orders, stop-limit orders, or conditional orders.

Step 5: Submit the order and wait for it to be filled.

Step 6: Monitor the order and adjust or cancel it if needed.

Step 7: Once the order is filled, the proceeds from the sale will be credited to your account.

2. Cons

The cons of investing in an ETF include trading costs, potential liquidity issues, risk that the ETF will close, and higher costs for ETFs with low assets under management or low daily trading averages. There is also the potential for tracking error, as well as settlement dates that can delay reinvestment of funds. With synthetic ETFs, there is also a lack of transparency, complexity, and potential conflicts of interest, as well as lack of regulatory compliance.

Not always a good investment

When considering an ETF as an investment option, there are a few times when it may not be the best choice. Firstly, ETFs tend to be less expensive than other baskets of investments such as mutual funds, but there are still costs associated with them such as trading costs. If you invest small amounts frequently, there may be lower cost alternatives available. Additionally, some ETFs are thinly traded, meaning they can have wide bid/ask spreads and may not be as liquid as other investments. This could lead to higher costs in the long-term. Lastly, ETFs may also have tracking errors which can lead to discrepancies between the ETF and its underlying index. Overall, it is important to consider the costs and risks associated with ETFs before making a decision.

May not be available in all countries

When investing in an ETF, there are restrictions that vary by country. For example, in Belgium, Denmark, and France, investors need to obtain permission from the authorities in order to invest in ETFs. In Europe, the European Union has set up regulations to ensure the stability and security of financial markets and the protection of investors. In Finland, ETFs are subject to a higher degree of taxation than other investments, while in Luxemburg, certain restrictions apply depending on the type of ETF. In The Netherlands, ETFs are subject to a 10% withholding tax, while in Norway, ETFs can only be purchased or sold through authorized financial institutions.

In Spain, ETFs are subject to a threshold of 1.2% of the value of the ETF, with a maximum of €600,000. In Sweden and Switzerland, investors need to obtain written consent from the authorities before investing in ETFs. In the United Kingdom, ETFs are subject to capital gains tax and the taxation of dividends when held in tax-deferred accounts. In the Middle East and Africa, ETFs are subject to different rules and regulations set by the respective governments.

In the United States and Canada, ETFs can be traded on various exchanges, but investors must also be aware of the regulations set by the respective countries. In Latin America, ETFs are subject to certain restrictions, such as the limits on short selling and borrowing. Finally, in Australia, Hong Kong, Japan, Singapore, and Taiwan, ETFs are subject to the regulations set by each respective country.

Overall, when investing in an ETF, investors should be aware of the restrictions and regulations set by the country in which they are investing.

May have limited liquidity

Limited liquidity can have a significant impact on the pros and cons of investing in an ETF. On the positive side, ETFs allow for diversification and provide access to a wide range of assets that may not be available otherwise. On the other hand, ETFs with low AUM or low daily trading averages tend to have higher trading costs due to liquidity barriers, such as wide bid-ask spreads or delisting from the listing exchange. This can lead to investors not being able to easily buy and sell shares, and in some cases, an investor may incur costs attributed to the difference between the buying and selling price. Further, ETFs may also be liable to flash-crashes or market instability if their trading volumes are too low, leading to excessive inflows and outflows.

What risks are associated with ETFs?

1. Exchange-traded funds are complex investments, which may make them difficult to understand.

Exchange-traded funds can be complex, and this complexity can make them difficult to understand. ETFs are baskets of securities that trade on an exchange like a stock, and they can contain a variety of investments such as stocks, commodities, bonds, and more. Additionally, ETFs offer low expense ratios and fewer broker commissions than buying stocks individually. The variety and complexity of ETF investments can make it difficult for individual investors to understand the risks associated with them and make informed decisions about their investments. Furthermore, ETFs use passive management, meaning that the investments are not picked by people, unlike mutual funds. As a result, ETFs may not be the best choice for investors who want to actively manage their portfolio. Ultimately, when evaluating ETFs, investors should consider management costs and commission fees, how easily they can buy or sell them, how they fit into their existing portfolio, and the quality of their investments.

2. ETFs may be riskier than other investments

The risks associated with ETFs include: trading costs, illiquidity, tracking error, settlement dates, potential overvaluation, lack of advertised focus, and higher expenses than individual stock purchases. They can also cause market instability and lead to flash-crashes due to extreme inflows and outflows, and their untested portfolio models in different market conditions.

3. Some ETFs track risky assets, which may result in large losses

Some of the risky assets that some ETFs track and may result in large losses include commodities, currencies, emerging markets, and volatility indices. Examples of ETFs that track these types of assets are ETFs that invest in oil, gold, foreign currencies like the euro, emerging markets such as the BRIC countries, and volatility indices like the VIX. These ETFs, while potentially offering higher rewards than cash investments, can also be very risky and may result in large losses.

4. Some ETFs are not as liquid as other investments

When ETFs are not as liquid as other investments, it can cause higher trading costs and wider bid/ask spreads for investors. This increases the risk of investing in ETFs, since there is a greater chance that the investor will buy at the higher price of the spread and sell at the lower price of the spread, resulting in lower returns. Additionally, when ETFs are not as liquid, it can create tracking errors, where the ETF does not accurately track its underlying index, resulting in additional risk. Lastly, when ETFs are not as liquid it can cause longer settlement times, where the funds from an ETF sale are not available to reinvest for a longer period of time, further increasing risk.

5. Some ETFs have high fees

ETFs can have various fees associated with them depending on the type of ETF and its investment strategy. Some of these fees include expense ratios, broker commissions, transaction fees, and sales charges. Expense ratios are administrative and overhead costs that are used to operate and manage the fund, and are usually quite low. Broker commissions are charged when the ETF is traded on a stock exchange, while transaction fees are paid by national securities exchanges to the SEC. Some ETFs may have sales charges known as front-end or back-end loads, while others do not have any such fees. Lastly, some brokers offer no-commission trading on low-cost ETFs to help reduce costs for investors.

6. Some ETFs are not well-diversified

The risks associated with some ETFs not being well-diversified include: the potential for overvaluation, not providing the level of targeted exposure advertised, lower return potential than buying individual stocks, increased costs due to management fees, and increased exposure to market volatility. Additionally, if an ETF does not have enough diversification, it may be underexposed to certain industries or geographical regions, which can lead to a lack of balance in the portfolio.

7. ETFs may be difficult to sell at exactly the right time

ETFs may be difficult to sell at exactly the right time due to their varying levels of liquidity. Some ETFs, particularly those that are less popular, may have low trading volumes, wide bid/ask spreads, and long settlement dates. This can lead to a situation where the investor is unable to sell the ETF when they want, and may have to settle for the high price of the spread, or wait the full two days for the funds to be available, both of which could result in an unfavorable sale. Additionally, new regulations following the 2010 Flash Crash have put ETFs under greater scrutiny, making it more difficult to sell at exactly the right time.

8. Some ETFs are not backed by any assets

The risks associated with some ETFs that do not have any assets backing them include lack of transparency; increasing complexity; conflicts of interest; and lack of regulatory compliance. Additionally, these ETFs could be overvalued, have wide bid/ask spreads, tracking error, and delayed settlement dates. Furthermore, they may be less focused on the target area or industry they are claiming to track, or be heavily concentrated in one industry or a small group of stocks, or assets that are highly correlated to each other.

9. Some ETFs are not regulated by any government agency

Investing in ETFs can offer advantages that you may not get from trading individual stocks or bonds on your own, but they also carry risks that are not associated with other types of investments. Some ETFs are not regulated by any government agency, which could leave investors vulnerable to potential losses. Risks associated with these unregulated ETFs include a lack of transparency in products and increasing complexity, potential conflicts of interest, and lack of regulatory compliance. Additionally, an ETF can be overvalued, not as focused as advertised, and have higher trading costs than other investments. Finally, ETFs can be subject to tracking errors and settlement delays.

10. There may be information gaps in ETFs, which may make them riskier than other investments

One of the biggest information gaps in ETFs is their potential to be overvalued. This can cause investors to pay more for the ETF than it actually owns, resulting in a risk of taking on more debt than expected. Furthermore, ETFs may not always offer the level of targeted exposure that they claim to, as companies within the fund may earn a portion of their sales from outside the target area. This could lead to investors not being able to accurately gauge their level of exposure to certain markets. Finally, ETFs are designed to be maintenance-free investments, and new investors may not be aware of the dangers of overtrading. This could lead to investors taking on more risk than they are comfortable with, and incurring additional trading costs.

How do ETFs compare to other investment vehicles?

ETFs compare favorably with other investment vehicles in terms of investment choice, diversification, cost, and focused investments. ETFs provide access to a wide variety of asset classes and enable investors to “slice and dice” the investing universe and gain exposure to specific investing “themes.” ETFs are typically more liquid than mutual funds and can be bought and sold at any time the stock market is open. ETFs also have lower investment costs than mutual funds and have an asset-weighted average expense ratio of 0.16 percent for stock index ETFs and 0.12 percent for bond index ETFs. In addition, ETFs often have the ability to target specific sectors or investing themes such as high-yield stocks or value-priced stocks, biotech stocks or companies with exposure to Brazil or India, for example.

Exchange-Traded Funds	Mutual Funds	Stocks
Exchange-traded funds (ETFs) are a type of index funds that track a basket of securities.	Mutual funds are pooled investments into bonds, securities, and other instruments that provide returns.	Stocks are securities that provide returns based on performance.
ETF prices can trade at a premium or at a loss to the net asset value (NAV) of the fund.	Mutual fund prices trade at the net asset value of the overall fund.	Stock returns are based on their actual performance in the markets.
ETFs are traded in the markets during regular hours just like stocks are.	Mutual funds can be redeemed on y at the end of a trading day.	Stocks are traded during regular market hours.
Some ETFs can be purchased commission-free and are cheaper than mutual funds because they do not charge marketing fees.	Some mutual funds do not charge load fees, but most are more expensive than ETFs because they charge administrative and marketing fees.	Stocks can be purchased commission-free on some platforms and generally do not have charges associated with them after purchase.
ETFs do not involve actual ownership of securities.	Mutual funds own the securities in their basket.	Stocks involve physical ownership of the security.
ETFs diversify risk by tracking different companies in a sector or industry in a single fund.	Mutual funds diversify risk by creating a portfolio that spans multiple asset classes and security instruments.	Risk is concentrated in a stock’s performance.
ETF trading occurs in-kind, meaning they cannot be redeemed for cash.	Mutual fund shares can be redeemed for money at the fund’s net asset value for that day.	Stocks are bought and sold using cash.
ETFs are the most tax-efficient of all the three types of financial instruments. This is because ETFs are treated as in-kind distributions, meaning that when an investor sells an ETF, the profits and losses from this sale are treated as if they were received as a distribution from the underlying assets in the ETF.	Mutual funds offer tax benefits when they return capital or include certain types of tax-exempt bonds in their portfolio.	Stocks are taxed at either ordinary income tax rates or capital gains rates.

What are some of the most popular ETFs?

Some of the most popular ETFs include the SPDR S&P 500 (SPY), iShares Russell 2000 (IWM), Invesco QQQ (QQQ), SPDR Dow Jones Industrial Average (DIA), sector ETFs such as oil (OIH), energy (XLE), financial services (XLF), real estate investment trusts (IYR), and biotechnology (BBH), commodities such as gold (GLD), silver (SLV), crude oil (USO), and natural gas (UNG), and country ETFs such as China (MCHI), Brazil (EWZ), Japan (EWJ), Israel (EIS), emerging market economies (EEM), and developed market economies (EFA). Additionally, other popular ETFs include the BNY Mellon US Large Cap Core Equity ETF (BKLC), SoFi Select 500 ETF (SFY), JP Morgan Betabuilders U.S. Equity ETF (BBUS), iShares Core S&P 500 ETF (IVV), Invesco Solar ETF (TAN), First Trust NASDAQ Clean Edge Green Energy Index (QCLN), SPDR S&P Semiconductor ETF (XSD), iShares Global Clean Energy ETF (ICLN), Invesco DWA Technology Momentum ETF (PTF), Technology Select Sector SPDR Fund (XLK), VanEck Retail ETF (RTH), Fidelity MSCI Information Technology Index ETF (FTEC), and Invesco WilderHill Clean Energy ETF (PBW).