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Exchange Traded Funds

What's an ETF?

Exchange Traded Funds (ETFs) have grabbed the attention of investors given some unique advantages over mutual funds. ETFs are quite simply a basket of stocks or bonds that typically track a market index such as the S&P 500 or the Dow Jones Industrial Average.

An ETF is similar to a mutual fund in that they both work to diversify risk by holding a collection of stocks and/or bonds. However, an ETF is a security that can be traded throughout the day just like a stock on the major exchanges. A mutual fund works differently. A mutual fund's net-asset value is calculated at the end of each day and shares are redeemed once a day at this price.

Another advantage of ETFs is that they tend to have lower expenses than mutual funds, and ETFs are predominantly index funds. Mutual funds tend to have higher expenses as most are actively managed and incur the additional costs of fund managers and researchers. These fund managers are typically trying to beat the performance of a particular index. Unfortunately, few have historically succeeded over any substantial period of time. And even index mutual funds can incur greater expenses than ETFs due to how mutual fund shares are issued, which can make them more expensive than ETFs.

To learn more about the advantages of ETFs, please read "Why ETFs are a Great Fit for 401(k) Plans."

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