Consider ETFs

Many people haven’t heard of exchange-traded funds (ETFs), but they’re worth learning about, as they can serve investors very well. An ETF is a lot like a mutual fund, but it trades like a stock. Many are based on indexes and, like index mutual funds, they will instantly have you invested in the securities that make up the index they track. Here are the ticker symbols for a few ETFs of major indexes: S&P 500 (SPY), Nasdaq 100 (QQQ), total U.S. stock market (VTI), total world stock (VT), Dow Jones Industrial Average (DIA), Russell 2000 (IWM) and Bloomberg Barclays U.S. Aggregate Bond (AGG). Like index mutual funds, ETFs are among the simplest and easiest investing strategies. If you want to manage some or all of your money passively (i.e., not studying and then buying and selling individual stocks), ETFs can provide significant advantages. For example, ETFs will often feature lower fees than corresponding mutual funds, and they can be more tax-efficient, too, with less frequent trading than their mutual-fund counterparts. While many mutual funds require minimum investments of $1,000 or more, you can buy as little as a single share of an ETF through your brokerage account, with many costing $100 to $300 per share. Like stocks, ETFs can be shorted, optioned and margined. This isn’t necessarily a good thing. Neither is the fact that since they can be easier and less expensive to invest in than mutual funds, some people jump in and out of them frequently. Doing so can eat up any cost benefit by racking up trading costs — and buying and selling any stocks or funds rapidly can also hurt your performance. Before buying any ETF, read up on it to understand exactly what its holdings and fees are. To learn more about ETFs, click over to morningstar.com/etfs.html or visit fool.com and enter “ETF” in the search box. To see some ETFs (and mutual funds) we’ve recommended, try our “Rule Your Retirement” service at fool.com/services.