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ETF Varieties

ETF Varieties

1. Index-Based ETFs

The majority of ETFs on the market are index-based ETFs. These ETFs strive to track a securities index, such as the S&P 500 stock index, and generally invest primarily in the index’s component securities. For example, the SPDR, or “spider” ETF, which tries to track the S&P 500 stock index, invests in the majority or all of the equity securities in the S&P 500 stock index. Some ETFs, although not all, may post their holdings on a daily basis on their websites.

2. Actively Managed ETFs

ETFs that are actively managed are not based on an index. Instead, they invest in a portfolio of stocks, bonds, and other assets to attain a stated investment aim. Unlike an index-based ETF, an adviser of an actively managed ETF may purchase and sell components of the portfolio on a daily basis without regard for index conformance.

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Before investing in an ETF, read both its summary prospectus and full prospectus, which contain thorough information on the ETF’s investment objective, primary investment methods, risks, fees, and historical performance (if any). You can find a specific ETF prospectus via the SEC’s EDGAR system as well as Internet search engines. Prospectuses are also available on the websites of the financial firms that sponsor a certain ETF, as well as through your broker.

Don’t put money into something you don’t comprehend. If you can’t communicate the investment opportunity in a few words that everyone can comprehend, you should evaluate the potential investment.

Finally, you might want to consult with an investment specialist. If you do, make sure you work with someone who understands your investment goals and risk tolerance. Your investment advisor should understand complex products and be able to explain to you whether or not they are compatible with your goals.

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