What’s an ETF, and Why Should You Care?
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ETFs will probably play a huge role in your ability to retire with money in the bank.
An ETF -- which stands for “exchange-traded fund” is a lot like a mutual fund -- it’s a security that takes a bunch of money from a lot of people and uses it to buy a basket of different stocks or bonds or other types of investments. The big difference between an ETF and a mutual fund is that you buy a share of an ETF on an exchange, like the New York Stock Exchange, instead of directly from a mutual fund company.
So how do you want to use them? A lot of ETFs are index funds -- which means they mirror a big benchmark, like the S&P 500. That’s cool because index funds tend to do better than funds where a manager picks the stocks or bonds to put in the fund. It turns out that humans just aren’t that smart.
In fact, operating costs of ETFs are generally cheaper than those of mutual funds -- even index funds -- so if they’re sitting in your account for years and years, you’ll probably end up with more money. You also might be able to start investing in ETFs with less money upfront than with a mutual fund.
One downside is that depending on which broker you use, you may have to pay trading costs to buy or sell an ETF. So picking between an ETF and a similar mutual fund comes down to personal convenience.
Check out the Money 50 to see a bunch of good ETFs that might be right for you.