The Dividend.com Guide to Investing in ETFs

An ETF, or Exchange-Traded Fund, is a bundle of securities that is similar to a mutual fund, but trades on exchanges like a stock. Investors use ETFs to add diversification to their portfolio by adding exposure to a major index or by adding other types of exposure like foreign equities or real estate.

ETFs are great for investors that seek exposure to a specific industry, but do not want to invest in an individual company. For example, an investor who is interested in companies like Apple (AAPL ), Microsoft (MSFT ) and Google (GOOG) may not want to invest directly in these companies, but they have the option of buying an ETF like the iShares U.S. Technology ETF (IYW ) – an ETF that has all three companies as top holdings.

ETFs are also gaining international exposure. Investing in foreign stocks can be a great way to get potential growth exposure for your portfolio, but it can also be very complicated. The easiest way for an American investor to invest in foreign securities is to to buy an American Depository Receipt or an ETF. While buying an ADR can be a good option for an investor, ETFs can allow investors to gain even more diversification. Investors have the choice of buying an ETF with exposure to a specific country, or they can choose to invest in a specific type of market, such as an emerging markets ETF like Emerging Markets ETF (VWO ).

Bond exposure is important for many investors, but investing in bonds can often require a large amount of money. By investing in a bond ETF, investors are able to gain exposure to the type of bond of their choice – whether it be municipal bonds or bonds from a specific state.

Investing in currency is a great way to add diversity to your portfolio, and currency ETFs can be a simple and effective way to do this. There are several ETFs that offer exposure to different currencies, including the dollar, euro, yuan, yen and pound.

ETFs are also very popular options for investors seeking exposure to commodities. By investing in a commodity ETF, investors can add exposure to agriculture, metals, precious metals, oil & gas, or other commodities.

Buying and Selling
Both ETFs and mutual funds can be bought and sold with a brokerage account. The primary difference is that ETFs can be bought and sold throughout the trading day as their price fluctuates, while mutual fund prices are updated once per day after the market closes.

Expenses
ETFs are typically cheaper to purchase than mutual funds. In some cases, investors can purchase ETFs or mutual funds commission-free through certain brokerages. ETFs are also much more tax-efficient than mutual funds.

See 5 Charts to Put Mutual Fund Expenses in Perspective.

Minimum Investment
While there is no minimum investment for purchasing an ETF, many mutual funds have a minimum investment, which can be at least $1000. For investors with limited funds, an ETF may be the better choice to make.

For dividend investors that are interested in purchasing an ETF, Dividend ETFs can often be a good choice. Below is a list of dividend-focused ETFs.

ETFs can be a great option for dividend investors who are seeking additional diversification. These funds can also be a great way to add exposure to great dividend stocks without buying the stocks individually. For more information on ETFs click here.