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Financial Literacy - Financial tuneup
OVERVIEW
Investing fundamentals
Here's the lowdown on the pros and cons of the basic types of investments.
Investment tuneup

Building blocks for successful investing
Investments:
Stocks
Mutual funds
Bonds
TIPS
REITs
ETFs
CDs

ETFs
Exchange-traded funds, or ETFs, have been gaining in popularity in recent years, though they have been around for a while, says Brosious. Good for tax-conscious investors looking to pay less in expenses, ETFs work essentially like a mutual fund with some characteristics of stocks. "These actually trade like an individual security but they are a basket of individual securities, just like a mutual fund," Brosious says.

ETFs follow market indexes in their investing strategy. Because of this, their operating expenses are less costly than those of the average mutual fund, says Flower.

Advantages and disadvantages of ETFs
Pros
Like mutual funds, ETFs bring instant diversification with one investment. Unlike mutual funds, "they are very tax-efficient," says Kinder. "For two reasons: one, low turnover because they are mostly index-based, but secondly, you don't have taxes based on other peoples' actions."
Generally, ETFs minimize investors' exposure to taxes until the shares held are sold. Lower fees also sweeten the pot. Their expense ratios are comparable to those of index funds.
Cons
ETFs can be bought and sold at any time during the trading day. Because they are traded like stocks, each transaction comes with a broker's fee. "If you set up a brokerage account you're going to pay a transaction cost to buy it every time right upfront," says Kinder.
ETFs also lack a little bit of the convenience of mutual funds. "Because they trade like a stock, the option of having dividends and capital gains automatically reinvested is unavailable," says Brosious.
-- Updated: June 11, 2009
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