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Originally published Saturday, June 29, 2013 at 8:00 PM

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Coming to terms: ETFs

ETFs are kind of like mutual funds that trade like stocks.

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You may want to add some exchange-traded funds (ETFs) to your portfolio — once you know what they are.

ETFs are kind of like mutual funds that trade like stocks.

Many are index-based, permitting you to be invested instantly in the securities that make up that index.

Here are the ticker symbols for a few ETFs of major indexes: S&P 500 (SPY), the Nasdaq 100 (QQQ), Total Stock Market (VTI), Dow Jones Industrial Average (DIA), Russell 2000 (IWM), iShares MSCI Japan Index (EWJ), Barclays Aggregate Bond (AGG).

Often sporting low fees and tax-efficient infrequent trading, ETFs offer easy diversification.

They’re also among the least time-consuming of all investing strategies. If you want to manage some or all of your money passively, ETFs can provide significant advantages.

Like stocks, ETFs can be shorted, optioned and margined. This isn’t necessarily a good thing.

ETFs are almost too easy, and as a result, they have been used extensively as short-term investments, the complete antithesis of index investing.

John Bogle, the father of index investing, once likened ETFs to a shotgun, saying, “They can be used for self-defense, or they can be used for suicide.”

Trading in and out of ETFs eats up any cost benefit by racking up trading costs. (Trading in and out of any stocks rapidly can also hurt your performance.)

ETFs are not always great for those who dollar-cost average, investing small sums systematically to build up a portfolio.

Since you invest in ETFs like stocks, through your brokerage, you pay trading commissions to do so. Thus, dollar-cost averaging with small sums can be costly. Still, if you want to invest a modest sum in a broad index, you can buy a few shares of it via an ETF.

Before buying any ETF, read up on it to understand exactly what its holdings and fees are. To learn more about ETFs, click on morningstar.com/Cover/ETFs.aspx.

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