Exchange Traded Funds (ETFs) - explained

Exchange traded funds (ETFs) offer diversified, low-cost and tax-efficient access to the world’s investment markets. ETFs are designed to track the performance of specified indexes, less fees.

WHAT ARE THE BENEFITS OF ETFs?

iShares Core ETFs have outperformed 76% of their peers on average over the past five years¹

ETFs are 1/10 the price of the average active mutual fund ²

5.6% of iShares ETFs on average paid capital gains distributions over the last 5 years vs. 54% of mutual funds³

Comparing ETFs and mutual funds

Many investors are familiar with mutual funds. How are ETFs similar?
And what makes them different?

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Similarities

Diversification

You get a diversified collection of stocks and/or bonds, which can potentially help reduce risk compared to individual securities.

Professionally managed

The funds are overseen by professional managers.

Risk and reward

The risk profile of an ETF is derived from its underlying holdings, as with mutual funds.
Differences

Cost

ETFs typically cost less than comparable mutual funds (⅓ the cost, on average), and there are no hidden loads or fees. (Your broker may charge a transaction fee, though many iShares ETFs are available commission-free at providers like Fidelity⁴). What’s more, your taxes may be significantly lower: tax costs for iShares ETFs on average are less than ½ those of the average mutual fund³.

Fund performance

Most ETFs seek to closely match the performance of an established stock or bond index, such as the S&P 500 or the Bloomberg Barclays U.S. Aggregate Bond Index. Actively managed mutual funds try to beat the index, which can be hard to do, especially after fees and taxes. iShares Core ETFs have outperformed more than 75% of their mutual fund peers on average over the past 10 years¹.

Buying and selling

As with stocks, you can buy and sell ETFs at the market price whenever the market is open. Mutual fund shares are purchased directly from the fund at Net Asset Value (NAV) and priced once a day after the market closes.

Knowing what you own

Because ETFs usually aim to track an index, their holdings change relatively little over time – without the “style drift” that may surprise mutual fund investors.