ETFs have enjoyed rather dramatic growth in recent years, both in the number of funds that are available and the amount of cash they have attracted. Among the reasons that may have conributed to this success are certain characteristics that ETFs share with mutual funds as well as some benefits that ETFs offer that mutual funds may not:
Like mutual funds, ETFs can help you allocate and diversify your portfolio
Unlike many mutual funds, ETFs have a high degree of transparency
Also unlike some mutual funds, ETFs are relatively tax-efficient investments
To reach your investment goals, it's important to allocate your assets by spreading your principal among the major asset classes — stocks, bonds, and cash — in proportions that fit your time horizon and tolerance for risk. You may find it is more economical to achieve the balance of stocks and bonds you want, as well as some exposure to international investments or real estate, using ETFs rather than buying individual securities or actively managed mutual funds.
What you can't find is an ETF comparable to a balanced mutual fund that invests in both equities and bonds. That's because no index currently tracks a combination of both types of securities.
The first actively managed ETF was launched in March 2008, and other fund sponsors are in the process of developing their own.
Actively managed ETFs more closely resemble actively managed mutual funds but still trade throughout the day. These ETFs give investors potential for stronger-than-market returns, which is what a portfolio manager seeks to deliver through portfolio selection.
