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What is an ETF?

in partnership with Schroders Personal Wealth

An exchange-traded fund (ETF) is a type of investment fund that includes various assets, futures and stocks.

An ETF is an exchange-traded product – so it can be bought and sold on a stock exchange. Unlike some forms of investment, an ETF can be traded at any time.

ETFs can be exchanged and transferred on the stock market throughout the day and the price will often change depending on the specific market.

Remember, the value of investments, and the income from them, can go down as well as up. This means you could get back less than you originally invested.

Pros and Cons of ETFs

Pros of an ETFs

  • Access to commodities and emerging markets.
  • Can be traded, like stocks, throughout the day.
  • Easy to manage – with one process for buying and one for selling.
  • Typically, ETFs incur fewer capital gains taxes than mutual funds and only when making sales.
  • Most ETFs pay out dividends quarterly. The issuer must pay dividends held in their funds, but they can decide how much is paid. This is either as cash or additional shares.

Cons of ETFs

  • Value of shares might not match up with value of assets within an ETF.
  • Sales from an ETF take two days to become available.
  • ETFs can be less flexible than other types of investment.

ETFs: FAQs

  • The main difference between an index fund and an ETF is the way they are traded. While index funds are a form of mutual fund, ETFs are traded on the stock exchange.

  • Qualified dividends, where the investor has owned the underlying stock for at least 60 days, are eligible for capital gains tax and taxed at a rate of 5% to 15% depending on how much income tax the investor pays. Unqualified dividends are taxed at the investor’s usual rate of income tax

  • ETFs trade on the stock exchange. Their value can vary over the course of a single day, depending on the price of the underlying assets that make up that ETF.

  • Both ETFs and mutual funds are forms of investment that provide access to multiple assets across different industries. The key difference between the two is how they are managed.

    • ETFs can be bought and sold on the stock exchange at prices set by a specific market index.
    • Mutual funds can only be purchased at the end of each trading day based on a fixed price. They also tend to be actively managed by a fund manager, who decides where to allocate the fund’s assets.

Want to learn more about Investments?

Take a look at our investment page and find out how expert advice could help you.

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