DEAR TRUST OFFICER:
What are ETFs? What do ETFs invest in? Should ETFs be included in my portfolio?
“ETF” stands for Exchange Traded Fund. An ETF is similar to a mutual fund, in that it allows investments in a pool of assets. Unlike an open-ended mutual fund, which investors can purchase or sell at the close of trading every day, ETFs trade throughout the day. ETFs have surged in popularity, with net assets growing from $83 billion in 2001 to $1.337 trillion in 2012. However, the mutual fund universe is far larger, holding $13 trillion in assets under management at year-end 2012.
The majority of ETFs are designed to track an index, either of the market as a whole or an index of a market sector. As such, they are passive investments, and they may have lower costs.
Whether ETFs are right for you is a good subject to bring up with your investment advisor. There are many approaches to building a portfolio with appropriate risk and return characteristics, and the ETF may be right for some investors.
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