ETFs for the win

It's worth learning about exchange-traded funds (ETFs) because they can serve your portfolio well.

In a nutshell, an ETF is much like a mutual fund. Investing in one will mean you're investing in whatever securities (stocks, bonds, etc.) the ETF holds. While most mutual funds are actively managed — with financial professionals deciding what securities to buy, hold and sell — most ETFs are passively managed, aiming to closely match the performance of a certain index by holding the same securities.

Here are some (of many) prominent ETFs to consider: the SPDR S&P 500 Trust ETF (SPY), tracking the S&P 500; the Vanguard Total Stock Market ETF (VTI), tracking the CRSP U.S. Total Market Index; the Vanguard Total World Stock ETF (VT), tracking the FTSE Global All-Cap Index; and the iShares Core US Aggregate Bond ETF (AGG), tracking the Bloomberg U.S. Aggregate Bond Index.

Both mutual funds and ETFs charge annual fees (often called “expense ratios”), and many ETFs' fees are ultra-low — 0.03% is not uncommon.

While buy and sell orders for mutual funds are settled once a day, after the markets close, you can buy or sell shares of ETFs throughout the trading day, as they trade like stocks. And while mutual funds often have a minimum investment requirement, which can be as much as $3,000 or more, you can buy as little as a single share of an ETF, often for less than $200 — or even $100.

Before buying any ETF, learn exactly what its focus, holdings and fees are. Many broad-market index fund ETFs can serve you well for many years. But there are a few risky kinds of ETFs, such as “leveraged” ones that use debt and sometimes derivatives — such as options and futures contracts — to amplify gains. They can wipe you out quickly, so steer clear unless you understand them well.

Like index mutual funds, index ETFs are among the simplest and easiest investing strategies, suitable for most investors. You can learn more about ETFs at the “Investing Basics” nook at Fool.com, or at sites such as Morningstar.com.