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Most investors unfamiliar with ETFs

By Sheyna Steiner ·
Wednesday, December 29, 2010
Posted: 8 am ET

Exchange-traded funds were introduced back in 1993 and have enjoyed increasing popularity ever since. Despite that popularity and accolades from the investment industry, most investors say they don't know what ETFs are.

That's according to a recent survey by Mintel, a market research company.

The survey found that only 5 percent of respondents own ETFs. Sixty-five percent of investors who don't own ETFs say they don't own them because they are unfamiliar with them.

Apparently many investors who do own ETFs are not experts on the investments either. The survey found that only about half, 54 percent, of ETF owners say they are very knowledgeable when it comes to ETF investing.

ETFs do seem more complicated than mutual funds or individual stocks, at least in their construction. But, for investors, ETFs have features of both mutual funds and stocks.

Like mutual funds, the value of the investment is based on an underlying bundle of securities. ETFs and mutual funds are priced differently though.

Unlike mutual funds which are priced at the end of the day, ETFs fluctuate in value throughout the trading day. They can be shorted, bought on margin and offer the possibility of options trading for those who are inclined.

Typically ETFs track an index like the Standard & Poor's 500, but there are more exotic ETFs out there as well as sector-specific ETFs.

In general ETFs have fewer fees than mutual funds, no minimum initial purchase requirements and are relatively tax efficient. Mutual funds generate capital gains at the end of the year whereas ETFs do not. Investors may incur capital gains when selling their ETF shares though.

To learn more about some of the pros and cons of ETF investing, read the Bankrate feature "Mutual funds vs. ETFs."

The report from Mintel speculates that many investors eschew ETFs because most 401(k) plans do not offer them as investment options. That may be changing in the future, but for now, only a handful of 401(k) providers offer ETFs as an investment option, reports in the story "ETFs in 401(k) plans: What it's all about."

Would you use ETFs if they were offered in your employer-sponsored retirement plan?

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