A stock is an ownership interest in a company.
Exchange-traded funds are a cross between index funds and stocks. Like index funds, ETFs hold baskets of securities that follow indexes. Unlike mutual funds, which are priced just once a day (at 4 p.m. eastern time), ETFs trade just like stocks throughout the trading day.
Because you can buy as little as a single share of an ETF, the minimum for owning an ETF is typically far less than for owning a mutual fund (many ETFs trade for $10 a share or less).
While ETFs make sense for individual investors, they have been slow to infiltrate the 401(k) market. Initially, retirement-plan administrators raised concerns that ETFs, with their all-day trading structure, would create a record-keeping nightmare.
Their low cost is appealing, particularly to sponsors of small and midsize plans looking for ways to hold down expenses.
They are less appealing to large plans that already benefit from rock-bottom fund fees due to their large volume and institutional pricing.
So far, ETFs are the exception rather than the rule on most 401(k) investment menus, but that could change in the future.
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