Exchange-traded funds (ETFs) are individual securities that track specific market indexes, trading throughout the day just like stocks; but unlike mutual funds, they are not priced once at the end of each trading session.
It's easy: ETFs simplify your life at a fraction of the cost of most mutual funds.In addition, they are generally more tax-efficient because they rarely produce capital gains.
Passive investing is the act of removing almost all buying and selling decisions from the equation in favor of holding for the long term. Active investors, especially those managing mutual funds, have consistently underperformed the major stock market indexes. In fact, 80 percent have failed to meet their benchmark. Given this type of performance, many investors decide that putting money in securities that mimic an index is far more sensible than always trying to hit a home run with the latest hot stock or fund. It may be boring but it works.
These days there are all sorts of specialty ETFs available but like any other investment, you need to do your homework. Here are some types of ETFs you might consider:
One type of ETF that is particularly popular these days is commodity funds. These funds invest exclusively in energy (like oil), metals (like gold) and agriculture (like wheat), and they are most often structured as exchange-traded funds. A commodity fund may track just one commodity index, or it may be based on a combination of commodities. Although commodities are considered volatile, and therefore risky, investments, historically in recessions commodities recover before other indexes, making commodity funds an attractive option right now.
A portfolio comprised entirely of ETFs is considered by many to be the most cost and tax-efficient way to invest in the markets. Once you've established your asset allocation model and done your investment selection, you'll be able to sit back and relax.
That's what passive investing is all about. Letting the markets take care of themselves.