Exchange-traded funds, or ETFs, are tools that investors of a wide range of skill or wealth levels can use to achieve broad diversification in their portfolio at a reasonable cost. While ETFs have distinct benefits, these funds also have risks to keep in mind as you consider their place in your investment mix.

ETFs are similar to mutual funds: They are a pooled investment vehicle containing multiple underlying assets. The underlying assets might be bonds, commodities, stocks in individual companies, or other assets that trade together under a single ticker symbol. ETFs are typically designed to track a specific index, such as the S&P 500. ETFs trade throughout the day like individual stocks; mutual funds, by contrast, are settled at the end of the business day after trading closes.

The benefits of ETFs make them a frequently recommended portfolio addition. Like any investment, though, ETFs have risks that investors should consider, including the loss of principal. Your Truist Wealth advisor can help determine if ETFs are appropriate for you, but here are some potential benefits and risk factors to keep in mind:

Financial advisors often suggest clients consider incorporating ETFs into their mix of investments for several reasons, including:

1. Diversification. Similarly to traditional mutual funds, the broad basket of securities held by an ETF allows investors to diversify their holdings with one investment. A single ETF might provide exposure to stocks or bonds from around the globe or from many different industries. 
2. Liquidity. Unlike mutual funds that only settle after markets close, though, you can buy or sell an ETF at market price at any point during the trading day, just like an individual stock. That gives you added flexibility to respond to market shifts.
3. Low cost. Most ETFs track an established index, such as the S&P 500, that dictates the fund’s holdings. That strategy keeps costs down, especially compared with actively managed mutual funds or ETFs.
4. Tax efficiency. You’ll need to consult with your tax professional to understand your own situation, but in general, ETFs may have some tax-related advantages over traditional mutual funds. Mutual funds buy or sell securities from their portfolio to handle investor inflows and outflows, and any cash gains from those sales are distributed to shareholders who must then report capital gains on their tax returns. ETFs, in contrast, generally cover investor demands to buy or sell using an in-kind process that doesn’t generate any taxable cash gains. That means shareholders in the ETFs typically only have to report capital gains when they sell their ETF shares, not because of redemptions within the fund itself.

(Any comments or references to taxes herein are informational only. Truist and its representatives do not provide tax or legal advice. You should consult your individual tax or legal professional before taking any action that may have tax or legal consequences.)