WHAT IS AN EXCHANGE-TRADED FUND (ETF)?

ETFs can offer exposure to a portfolio of securities representing asset classes like stocks or commodities, specific sectors like information technology, various countries and regions, or different types of bonds.

Whether it’s at the grocery store, the mall or the gas station, a penny saved truly is a penny earned. The same is true when it comes to your investments, where keeping costs low can help you reach your goals sooner. Even small fees can have a big impact on your portfolio because not only is your balance reduced by the fee, you also lose any return you would have earned on the money used to pay the fee.

ETFs are widely available commission free on most online brokerage accounts and through investment professionals. You can also purchase directly through Fidelity, where iShares ETFs trade commission-free online.

When it comes to owning ETFs, a key element to consider is the Total Expense Ratio (TER), which represents the total cost of holding an ETF for one year. These costs consist primarily of management fees and additional fund expenses, such as trading fees, legal fees, auditor fees, and other operational expenses.

The primary goal of investing is typically to generate the highest possible return for the lowest risk. Diversification might be able to help you obtain this balance. By spreading investments across asset classes, geographies and sectors, investors may lower their risks as the poor performance of one investment could be offset by stronger performance in another, and vice versa.

Index ETFs generally seek to track indexes that are comprised of many individual securities, helping to spread the risk and reduce the impact of price swings in any one security. Although this does not eliminate risk entirely, the diversified structure of ETFs has the potential to improve the risk-adjusted return of your portfolio.

The deep liquidity of ETFs — the speed with which they can be bought and sold — comes from the markets on which they are traded. ETFs trade on exchanges and investors can buy or sell throughout the trading day, just like stocks.

And just like stocks, you can buy and sell ETFs in a variety of ways:

• Market orders execute as soon as possible at the best price available at the time. Market orders are best used when it’s more important to make sure the trade gets executed vs. the specific price.
• Limit or stop-limit orders mitigate the impact of intraday price swings by giving you more control over the price to buy or sell. Limit orders are particularly helpful in volatile markets but can expire if your price target isn’t met, meaning there’s no guarantee the trade will get done.
• Stop loss orders are triggered when the price of a security falls below a specific level. Stop orders can help protect your gains and limit your losses but trades may be delayed, especially in times of market stress.

The ease of trading ETFs gives investors more control over when and how they trade. This liquidity feature is one of the key benefits of owning ETFs, particularly when compared to mutual funds. Just make sure your order type is consistent with your goals.

You’ve probably learned that keeping fees low is a big driver of successful investing. And while that's important, taxes may be more harmful to long-term returns than fund management fees.

ETFs can help shield investors from from capital gains taxes.

A big reason for the tax efficiency of ETFs is the vast majority are index funds, which typically trade less frequently than actively managed funds. Low turnover means fewer sales of stocks that have appreciated, generating fewer taxable capital gains.

In addition, investors buy and sell ETF shares with other investors on an exchange. As a result, the ETF manager doesn't have to sell holdings — potentially creating capital gains — to meet investor redemptions. Mutual fund shareholders, on the other hand, redeem shares directly from the fund. The fund manager must often sell fund securities to honor redemptions, potentially triggering capital gains which then trickle down to the fund’s investors.

Certain traditional mutual funds can be tax efficient and, of course, ETF shareholders can incur tax consequences when they sell shares on the exchange, but that tax consequence is not passed on to other ETF shareholders.

For investments in so-called qualified accounts like a 401(k) or IRA, taxes are a less-immediate consideration. But for investors with taxable (non-qualified) accounts, owning cost- and tax-efficient iShares ETFs can help improve your long-term investment returns, allowing you to keep more of what you earn.

Knowing exactly what you own is important information you need when making financial decisions. Index ETFs aim to be straightforward and transparent about their investment objectives. In addition, information on ETFs holdings, performance and costs is published daily and freely available on the product page for each ETF.

While ETFs disclose holdings daily, that typically happens monthly or quarterly with mutual funds. Because of their longer disclosure cycle and the greater leeway that active fund managers have when choosing investments, some mutual funds have historically been affected by what’s known as “style drift.” Style drift occurs when a fund’s holdings change over time and sometimes stray farther from the fund’s intended strategy than investors may realize.

With ETFs, you’ll always be able to know what you own and don’t have to worry about style drift.

Index ETFs seek to replicate the performance of an underlying index, like the S&P 500. The vast majority of ETFs seek to track an index — also known as index or "passive" funds — wherein the ETF manager typically makes less buy and sell trades of underlying assets than an active fund manager does. This low turnover means fewer sales of stocks that have risen in price, resulting in the generation of less realized capital gains. Active ETFs seek to outperform a specific index — or achieve a specific outcome such as maximizing income — by underweighting or overweighting certain securities relative to an index weighting. Both active and index ETFs are professionally managed, but active ETFs typically require more monitoring and trading by the managers, which can result in higher fees.

Stock ETFs, also known as equity ETFs, invest in a basket of individual stocks. There are stock ETFs covering specific sectors, from technology and telecommunications to clean energy and consumer goods, as well as ETFs that provide exposure to international stocks, including regional, country-specific and sector-focused ETFs. In addition, there are equity ETFs that focus on size or a particular investing style, such as value or momentum.

Bond ETFs, also known as fixed-income ETFs, can provide investors access to thousands of bonds in a single trade. As with stock ETFs, bond ETFs trade on exchanges. Trading on exchanges provides greater liquidity, and transparency in pricing and execution, which can beneficial to investors in the more opaque, over-the-counter bond markets. Just like stock ETFs, bond ETFs come in a wide variety of flavors, or sub-sectors; these include U.S. federal and municipal bonds or international government debt, as well as specific sectors such as investment grade and high yield corporate bonds, mortgages, and emerging market debt.

Commodity ETFs seek to track the price of physical assets such as gold, oil and wheat. Commodity prices are generally not highly correlated to prices for stocks and bonds; moreover, commodity sectors typically have a low correlation to each other. Commodities also tend to rise in tandem with inflation. For these reasons investors often use exposure to commodities as a way to help diversify their portfolios, and to align with their views on inflation and the economic outlook. Commodity ETFs offer convenient, affordable access to individual commodities such as gold or silver, and exposure to broader sets of commodities, such as energy or agriculture.

International ETFs provide investors exposure to stocks and bonds from individual countries, like China; regions and subregions, like Latin America; and specific types of economies, including developed, emerging and frontier. As with domestic ETFs, international ETFs cover a broad range of specific sectors, investing strategies, factors and styles. Investing in international stocks and bonds can help investors reduce risk and potentially expose them to growth opportunities not available in U.S.-only portfolios.

Sector ETFs offer investors exposure to a basket of companies in specific industries such as technology, energy or healthcare. iShares sector ETFs are available with both a U.S. and global focus, providing investors an opportunity to express their views on a particular industry while limiting their exposure to the risks of owning individual stocks.

Everyone's investment needs are unique. Whether your goal is maximizing growth, generating income, managing risk, or other objectives, you need to create a plan — and stick with it. As Yogi Berra once said: “If you don't know where you're going, you'll end up somewhere else.”

Our Explore by goals tool is designed to help investors navigate iShares ETFs based on an investment goal rather than by an individual fund. These investment goals can include pursuing sustainable investing and maximizing growth, generating income, managing risk and parking short term cash.

After setting goals and comparing ETFs, go deeper to learn more about how each ETF measures up on key metrics, including performance, risk, cost, and core holdings.

ETFs are funds that trade on an exchange like a stock. They are an easy to use, low cost and tax efficient way to invest money and are widely available commission free on most online brokerage accounts and through financial advisors. Click here for more on How to buy ETFs.