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Know your Financial Lingo- What's an ETF?

An Exchange Traded Fund (ETF) is an investment that holds a number of similar assets in the same vehicle. In many respects, they are similar to mutual funds; however, ETFs tend to be passively managed, leading to lower management fees and higher returns for investors. 

 

Originally, ETFs were designed to mimic the performance of an index, such as the TSX 60 or Dow Jones Industrial Average. The ETF category has expanded and now there are more types such as Bond ETFs or ETFs of different sectors, such as technology stocks.

Comic, person one "lets look at ETFs for your portfolio", person 2 "ET what?"

Why you should invest in ETFs?

There are two reasons to hold ETFs in your portfolio:

1./ ETFs provide the benefit of diversification. With the purchase of one security, you can receive exposure to literally hundreds of different securities.

2./ ETFs have lower management fees than actively managed mutual funds, which means that you, the investor, keep more of the return, and less goes to the fund managers.

Summary

ETFs are popular investment vehicles because they provide diversification at a much lower cost than traditional mutual funds. There is a wide body of research that suggests index ETFs, on average, will outperform actively managed mutual funds over a long period of time.

WealthyPlanet's "Wealthopedia"  series demystifies financial terms and financial industry lingo. 

 

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