4.
Explanation
Exchange-Traded Funds (ETFs) are investment funds and exchange-traded products that combine features of both mutual funds and individual stocks.
1. Market-Traded: ETFs are traded on stock exchanges, just like individual stocks. Investors can buy and sell ETF shares throughout the trading day at market prices.
2. Diversification: ETFs typically hold a diversified portfolio of assets, such as stocks, bonds, commodities, or a combination of various asset classes. This diversification can help spread risk.
3. Passive and Active Management: There are two main types of ETFs: passive (index-tracking) and active. Passive ETFs aim to replicate the performance of a specific index, like the S&P 500, by holding the same assets in the same proportions. Active ETFs, on the other hand, are actively
managed by portfolio managers who make investment decisions.
4. Liquidity: ETFs are known for their liquidity, as they can be bought or sold during regular trading hours. This liquidity is a result of the secondary market where investors trade ETF shares among themselves.
5. Transparency: ETFs are required to disclose their holdings regularly, usually on a daily basis. This transparency allows investors to know what assets the ETF holds.
6. Lower Costs: ETFs often have lower expense ratios compared to traditional mutual funds. This can lead to cost savings for investors over the long term.
7. Tax Efficiency: ETFs are structured in a way that can be tax-efficient. The creation and redemption process can help minimize capital gains distributions to investors.
8. Wide Variety: There is a wide variety of ETFs available, covering different asset classes, sectors, regions, and investment strategies. Investors can choose ETFs that align with their specific investment goals and risk tolerance.
ETFs have become popular investment vehicles for their flexibility, transparency, and cost-efficiency. They offer a range of options for investors to access various asset classes and investment strategies, making them a versatile tool in building diversified portfolios.