HOW TO PROFIT FROM ETFs

These funds are a huge hit with investors. Plus, everything you need to know about the Kiplinger ETF 20, our favorite exchange-traded funds.

- NELLIE S. HUANG

Exchange-traded funds have never been hotter. Investors are pouring a record amount of money into ETFs, which hold baskets of securities like mutual funds do but trade like stocks. “It’s just explosive growth,” says Armando Senra, head of iShares America at BlackRock. Nearly as much new money has flowed into ETFs over the first half of 2021 than in all of 2020—which itself was a record year for inflows. “The pace has smashed the prior record to smithereens,” says Ben Johnson, director of global exchange-traded fund research for Morningstar. // In this age of skyrocketing “meme” stocks, it’s notable that much of the new ETF money is going— sensibly—into “boring, broadly diversified products,” such as S&P 500 index funds, says Todd Rosenbluth, head of ETF research at Wall Street firm CFRA. Investors use these ETFs as primary portfolio holdings; they spice up returns with sector or “thematic” ETFs, he says. Interest is broad: Individuals, advisers and institutions are all buying ETFs.

Some of the draw, as always, stems from how these funds work. Compared with mutual funds, ETFs charge lower annual fees. They also have no initial investment minimum, and they trade like stocks—meaning you can buy and sell shares throughout the day, buy on margin, and even sell them short. And because they dish out less in capital gains distributions to shareholders than mutual funds do, ETFs tend to be more tax-efficient (more on that later). But a new batch of investing trends— including the growing prominence of environmental, social and corporate governance concerns and the increasing number of actively managed and specialized ETFs—are also fueling interest in these funds.