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More and more investors are turning to exchange traded funds (ETFs) to meet a variety of financial goals. Yet there are several common misconceptions about how these versatile funds work and how to use them in your portfolio. Here’s the real story.

MYTH #1: ETFs are inherently risky.

REALITY: The risk profile of an ETF is tied to that of its holdings, so a fund will tend to reflect the risk profiles of its underlying investments, whether those are stocks, bonds or other kinds of assets. For example, an international stock ETF may present the possibility of greater volatility than a U.S. investment grade corporate bond ETF.

MYTH #2: ETFs are volatile because they trade throughout the day.

REALITY: The price of an ETF generally reflects the changing value of its underlying securities; the same is true for mutual funds. The difference is that mutual fund prices are set once a day, after the market closes, while ETF investors can see prices go up and down in real time. So ETFs may seem more volatile, but that’s not necessarily the case – their price changes are just more visible. For more information about the differences between mutual funds and ETFs, click here.

MYTH #3: ETFs are best used for niche markets.

REALITY: You can find an ETF in virtually any “flavor” you can think of, whether it’s hard-to-access markets, core building blocks for your portfolio, or funds that target specific outcomes. So while ETFs can be used for shorter-term exposures, their lower costs can also make them a sensible choice for larger, buy-and-hold investments, as savings compound over time and can help improve your bottom line.

MYTH #4: ETFs aren’t for income investors, since they don’t pay dividends.

REALITY: There are many types of ETFs that aim to provide income to investors, including those investing in dividend-paying stocks, bonds, and preferred stocks. With an ETF you can get greater diversification than individual stocks or bonds, at a lower cost than mutual funds.1

MYTH #5: ETFs are just for day traders.

REALITY: Because ETFs have the same trading flexibility as stocks, short-term traders can use ETFs to quickly move in and out of a position, using limit, market or stop-loss orders. But ETFs are also a cost-efficient way to build a long-term, core portfolio. In fact, 85% of ETF investors view them as long-term holdings, and 64% keep their ETFs for three to five years or longer.2