Relatively new investors may have heard about ETFs but are still unsure what they are. Well, ETFs, or Exchange Traded Funds, are a type of investment fund that is traded like a stock on the open markets, but typically track an index such as the Nasdaq-100 or S&P 500. First introduced in 1989, ETFs have grown in popularity over the last decade because of their ease to buy and sell, and low expense ratios. However, like any investment, there are pros and cons that the prospective owner should be aware of.
Over the long-term, the S&P 500 beats 80% of actively managed mutual funds (before tax benefits). Because of this fact, prominent investors such as Warren Buffett and Benjamin Graham recommend index funds for defensive investors and those looking to diversify their portfolio. Not only do they provide instant diversification, they also offer the benefit of being simple to own, as it represents owning an already established group of securities selected by finance companies such as Standard & Poor’s, Dow Jones and Nasdaq.
