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If you are one of the many millions of Americans who have invested money in traditional mutual funds, perhaps it is time to look into investing a portion of your assets into a select ETF financial instrument. If the thought of picking a winning basket of individual stocks makes you break out into a cold sweat, then ETFs might be just what you are looking for in a solid investment vehicle. The combination of low cost, relatively low risk, and widespread availability in almost any investment area have made investing in ETF funds highly attractive.

What Are ETF Funds?

ETF funds are easily understood if you think of them as having the characteristics of both a stock and a mutual fund. Essentially, an ETF represents a collection of stocks, much like an index such as the S&P 500. An ETF is not a mutual fund, but rather a financial instrument whose stock price fluctuates on a daily basis just as a single company on any stock exchange would do. So unlike a mutual fund, you will not find a final “net asset value” with an ETF. And unlike mutual funds, a buyer can purchase an ETF in the morning, and sell the same ETF in the afternoon if so desired.

History of ETF Funds

ETFs are considered relatively new financial instruments. The first ETF was created in 1989 under the name of an “index participation share” This first ETF was created to follow (by proxy) the S&P 500 index. Throughout the 1990s, investment firms continued to offer ETFs to investors that contained a wide variety of investments, including stocks, bonds, and even commodities.

Advantages of ETF Funds

It is easy to see why the popularity of ETF funds have soared over the last 20 years, given the multiple advantages they have over both individual stocks and traditional mutual funds.

For starters, ETFs generally have lower costs than other investments, mainly because they do not carry the burden of having to be actively managed. In addition, marketing, distribution, and accounting expenses are generally lower as well. Finally, most ETFs have no 12b-1 fees.

As mentioned earlier, ETFs have the buying and selling flexibilities of individual stocks. This characteristic opens up the possibilities for purchasing on margin, selling short, and even the ability for stop and limit orders. ETFs carry all of the advantages of individual stock trading without the higher risk that comes with it.

Because ETFs reflect a collection of stocks, bonds, or commodities, owner risk is limited because of their inherent diversification. This makes the owning of ETFs a much less stressful experience over single company stock purchases.

ETFs have become a tested and stable financial instrument for millions of investors for more than two decades. If you are an investor who enjoys not only the flexibility of owning individual stocks, but also the diversification and relative safety of mutual funds, then ETFs might be the perfect investment vehicle for you.