Exchange Traded Fund Vs. Real Estate Investment Trust
Investing in the stock market has become a way of life for consumers who desire to supplement their current or retirement income. With employment pension plans all but disappearing and dwindling government contributions, people are committing their income on investment vehicles they hope will provide them with a large return. Investment vehicles such as exchange traded funds and real estate investment trusts allow consumers the opportunity to invest their hard-earned dollars in entities they feel strongly about such as Fortune 500 companies or real estate assets.
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Exchange Traded Funds
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Exchange traded funds are constructed to mimic the design of traditional mutual funds. Individual stocks and bonds are grouped together to make up the fund, and they typically attempt to gain the same return as a market index such as the S&P 500. When investing in exchange traded funds, an investor experiences the same features of trading individual stocks and bonds without as much risk and for generally lower costs.
Real Estate Investment Trusts
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Real estate investment trusts are entities that invest in varying types of real estate. In order for a company to qualify as an REIT, the Internal Revenue Code requires it meet certain conditions. One such condition includes investing at least 75 percent or more of its assets in real estate. Real estate investment trusts can be traded on national exchanges similar to exchange traded funds, and they may also be traded over-the-counter. A key difference in real estate investment trusts and exchange traded funds is that REITs are required to focus their investments on a particular industry--real estate. Exchange traded funds have the flexibility to invest in any industry they like.
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Mutual Funds
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Mutual funds offer a diverse way for consumers to take advantage of investing in securities. Mutual funds are professionally maintained by fund managers who decide the best securities to invest in based on the goal of a particular fund. For example, a Real estate investment trust index fund will have a pool of securities that invest solely in real estate or real estate-related assets. REITs can be mutual funds but exchange traded funds cannot. Apart of the difference of exchange traded funds is that they are traded on the stock exchange but offer the diversity of a mutual fund.
Regulating Authority
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The financial and investment industry is regulated by the U.S. Securities and Exchange Commission. The commission seeks to protect investors and maintain markets. Investments made into real estate investment trusts or exchange traded funds are not guaranteed like deposits made into banks. The SEC attempts to protect the integrity of this industry because all investments have the potential to lose value.
Information for Investors
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The Financial Institution Regulating Authority encourages investors to follow best practices before and after making investments. Financial planners, securities dealers, and brokers must be licensed and meet state and federal requirements prior to assisting a consumer with investments. On occasion, however, brokers can make misrepresentations about certain securities and their risks. Also, it is important that financial professionals understand an investor's goals prior to making recommendations. If an investor considers investing in exchange traded funds or real estate investment trusts on his own, it is important he understands the risks involved and how much risk he is willing to take.
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References
- Photo Credit Stock Market image by Paul Heasman from Fotolia.com
