What is an ETF and how does it work?

Like a stock, ETFs are traded on a stock exchange, providing the flexibility to buy and sell throughout the trading day. Like a mutual fund, most ETFs allow you to own a variety of stocks or bonds inside one investment.

Exchange-traded funds offer the following benefits:

• Passive management – Most mutual fund managers practice active portfolio management by researching and handpicking individual investments in an effort to achieve a higher return or exhibit lower risk than a benchmark. Most ETF managers, on the other hand, simply try to match the return of a particular index, which is referred to as passive management. An index is a collection of individual securities designed to represent the return of a particular segment of the stock or bond market.
• Relatively low expenses – ETFs have an annual expense ratio to cover the management fees and other internal expenses of the fund. With passive ETFs, they generally try to mirror the return of an index rather than add value through individual security selection. These funds generally have lower management and administrative costs.
• Tax efficiency – The regular buying and selling that is part of portfolio management creates the potential for capital gains distributions and their resulting taxes over the life of an ETF investment.

We can help

All investments, including exchange-traded funds, carry a certain amount of risk. Your Edward Jones financial advisor can discuss your investment needs and select the most appropriate exchange-traded fund(s) to help meet those needs.