What is an exchange traded fund and how you can use it

Bogle on the cover of Common Sense on Mutual Funds

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Exchange traded funds, or ETFs, combine the benefits of mutual funds with the benefits of individual stocks. Like mutual funds, ETF shares represent ownership in many different securities. But unlike mutual funds, ETF shares trade in real time throughout the day, instead of being priced only once at the end of the trading day. If you are looking for a simple and easy to manage portfolio, you can build one with as few as three widely diversified ETFs.

Total Stock Market

Many investors choose to make the ETF that tracks the total U.S. stock market the core of their stock portfolios. It trades under the ticker symbol VTI, and like all ETFs investors can buy and sell it in real time throughout the trading day. That makes it easy for investors to get in and out at the price they choose, providing an important advantage over mutual funds.

Total Bond Market

Investors who need to derive current income from their portfolios can use the total bond market index for exposure to these income producing securities. One of the most widely used bond index ETFs trades under the ticker symbol BND. Keeping your bond market money in an ETF can reduce your expenses while helping you diversify your holdings. If you plan to make periodic investments in this fund, look for a broker that provides commission-free trades for ETFs. A growing number of online brokerage firms now provide commission-free trading for select ETFs.

World Index Fund

International exposure is an important part of any portfolio, and ETF investors can get exposure to the world markets with the ETF trading under the ticker symbol VEU. It represents the FTSE All World ex-US index; which provides broad exposure and wide diversification across both the developed and the developing world. That helps investors build a portfolio that provides a hedge against problems in the United States market while still providing growth opportunities through international exposure.

Balancing Your Portfolio

The percentage you put into each ETF in your portfolio depends on a number of factors including your risk tolerance, how long you can keep the money invested, what you need the money to do and your outlook for the U.S. and world markets. An investor who needs to derive current income from a portfolio might lean more heavily toward the total bond market index; while an investor looking for growth might focus more on the domestic and international ETFs in the portfolio. Keep in mind that your investment needs change over time, so checking and rebalancing the portfolio on an annual basis is always a smart idea.

ETFs provide a lot of advantages over regular traded funds, and if you want to make a quick profit and get out at any time this is the best choice for you.

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