Definition

ETFs share several key similarities with mutual funds. As with mutual funds, you have a wide variety of ETFs you can choose from. Each comes with its own investment style and objectives, reflected in its slate of holdings. Some ETFs aim to mirror the returns of key market indexes, while others focus on certain economic sectors or parts of the globe. You buy shares in an ETF just as you do with a stock or mutual fund. Because ETFs trade on an exchange, meaning you can buy and sell them throughout the trading day, they function more like stocks than mutual funds from a trading standpoint.

Taxes

Investors who use both tax-sheltered accounts such as IRAs and taxable accounts often aim to keep investments that trigger taxable events in the IRA. You don’t need to have this concern with ETFs. While you can choose to include an ETF as part of your IRA investment strategy, don’t make this choice for tax purposes. Because ETFs turn over their holdings less frequently than most mutual funds and produce fewer capital gains distributions, they serve as tax-efficient investments.

Considerations

References

Resources

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