Understanding Exchange Traded Funds (ETFs): A Comprehensive Guide

Exchange traded funds, also known as ETFs, are an increasingly popular investment security that any investor from beginners to experts can add to their portfolio. ETFs are funds that pool together the money of many investors to invest in a basket of

securities. ETFs often track an underlying index like the S&P 500, a particular industry like biotech, or a collection of other related assets like currencies or commodities. From the outside, ETFs and mutual funds look similar.

Both of these types of securities are professionally managed basket-like funds that hold a number of underlying assets. However, several important characteristics set these two types of funds apart.

For instance, ETFs are typically passively managed because they track indexes and mutual funds are typically actively managed. This means the fees and expenses associated with mutual funds can be higher, and mutual

funds often have investment minimums, which ETFs do not. Unlike mutual funds, ETFs actually trade much like stocks. Like the name implies, ETFs are traded on an exchange throughout the day.

Based on supply and demand, the price of an ETF can fluctuate above or below its net asset value during the day, meaning you may purchase it at a premium or discount. Mutual funds are only traded once per day and are priced based on their net asset value

at market close. Hundreds of ETFs exist for all types of asset classes, industries and more. Let's take a look at some of the most popular types of ETFs.

Stock ETFs. These track a particular set of equities that are often related by index or industry. For example, an ETF that tracks the Nasdaq 100 will be comprised of all the securities on

the Nasdaq 100 index. Bond ETFs. As you might guess, these invest exclusively in bonds.

Either government or corporate. Bond ETFs can be a more liquid investment than individual bonds because they will trade on an exchange throughout the day and these investments can be a valuable addition to a

fixed income portfolio as they typically pay monthly dividends. However, not all ETFs pay monthly dividends, and it's possible that dividends will fluctuate or be eliminated over time.

Sector ETFs. When you invest in a sector ETF, all the securities within the fund will relate to a particular industry.

You may also consider ETFs that invest in the commodities and currency markets, which connect is more accessible entrance points to these kinds of markets. ETFs can facilitate exposure to securities you might not otherwise invest in.

That's because one fund can hold many underlying securities. So when investing in an ETF, you only need to make one purchase to be exposed to the potential benefits of all the assets within.

Of course, investing in an ETF also exposes you to the potential risks of its underlying assets. And since most ETFs are passively managed, they can have lower expense ratios, or fees, you have to pay as an investor than mutual funds.

Another way ETFs are a cost efficient investment, they don't have investment minimums, and most brokers like Ally Invest offer hundreds of commission free ETFs, meaning there's no added cost when buying or selling them.

Of course, like any investment, investing in ETFs carry an inherent level of risk. Be sure to do your research and familiarize yourself with the securities held within an ETF before you invest.

Interested in ETFs? Here's what you need to remember. ETFs are basket like investments that can hold many underlying securities like stocks or

bonds. ETFs are not the same as mutual funds. ETFs are traded throughout the day on an exchange. ETFs are usually passively managed and can have relatively low expense ratios.

ETFs are a tool for building diversification in a portfolio. ETFs are not risk free.