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What’s An Exchange Traded Fund (ETF)?

ETF

Your Get Money Smart education would not be complete if we didn’t talk briefly about this next type of investment.

Good news! In the last lesson, you learned not only about mutual funds, but you also learned about exchange traded funds, or ETFs, as they are called.

ETFs are a little different from mutual funds, but generally speaking, they do the same thing. They are just a basket that holds investments. Again, those investments could be stocks or bonds or whatever.

So if you hear someone talk about a mutual fund or ETF, you now know these are just the packaging that holds some underlying investments.

But they sound similar, don’t they? So what makes an ETF different from a mutual fund? It comes down to taxes. Basically, you may be able to pay a lot less tax by owning an ETF instead of a mutual fund. Here’s why. A mutual fund, remember, is a basket of holdings. Those holdings may go up or down in value throughout the year. If there are a lot of gains, then the mutual fund has to pass those gains on to the mutual fund owners. That would be you. That also means those gains will be taxable to you. But not so with an ETF. The pros say ETFs are more tax efficient.

Chances are your portfolio will have a mixture of both mutual funds and ETFs, so it’s important to understand a bit about both.

The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.

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