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Exchange Traded Funds - Really Tax Efficient?

Exchange traded index funds have become quite popular in the last years. Specially for those people who are beginners in the securities market and are looking for an easy solution for their investment needs.
The only thing that they have to do is to look for a list of exchange traded funds, choose an ETF of their liking and buy it as it was regular stock. And, everything can be done from the commodity of your own office or home.

What Are Exchange Traded Funds?

Exchange traded mutual funds (also known as ETF's) are a special kind of financial investment tool. The idea behind an ETF is to replicate stock market indexes, like the Standard & Poor (S&P) 500 or the NYSE ARCA Tech 100, focusing on a determined market sector.

Some example of market sectors are information technology, consumer goods, utilities, energy, transport or the aerospace industry. Another possibility is to choose a determined commodity, like gold, oil, copper, fishmeal, soybean oil, coffee, sugar, cocoa or even orange juice.

The difference between ETF's and a typical index is that the ETF trades as any kind of share in an exchange. That means that it is subject to the up's and down's of the stock market. Since the price of an ETF fluctuates during the day, it doesn't have a net asset value (NAV) as mutual funds have (the NAV is the total value of the fund's portfolio minus it's liabilities).

Another characteristic of an ETF is that it is an open-ended collective investment scheme. Since it is open-ended, it means that it doesn't have a limited life period. And, since it is collective, anyone can invest in it. After all, it is available at any stock exchange of the world.

Continue to: What Are Their Advantages When Compared With Open End Mutual Funds?

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