Characteristics of exchange-traded funds

Minimum requirements of a deposit

An indexed equity traded fund provides investors with a diversified index fund, as well as the opportunity to sell short-term. In this case the fund has the minimum requirements of a deposit. However, not all ETFs are equally diversified. Some may contain a small group of stocks, or assets that are highly correlated with each other.

Win or lose investment

While ETFs give investors the ability to make or lose investment, they also benefit from companies that pay dividends. Dividends are a part of the profits allocated or paid by companies to investors to maintain their shares.

Shareholders

Shareholders of exchange-traded funds are entitled to a proportion of the earnings, such as interest earned or dividends paid, and may earn a residual value in the event of a liquidation of the fund.

Taxes

An exchange-traded fund is more efficient from a tax point of view than a mutual fund since shares are bought and sold at the same time. ETF sponsors do not need to redeem shares for each time an investor wishes to sell. Redempting shares in a fund can trigger a tax liability, so listing the shares on an exchange can keep tax costs lower. In the case of a mutual fund, taxes are generated each time an investor sells his shares.

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