ETFs can be a powerful addition to your portfolio.

You’ve probably heard of exchange-traded funds (ETFs). Maybe you’re even invested in them. But chances are you still have questions. Russ Koesterich, BlackRock’s Global Chief Investment Strategist, offers a primer on this increasingly popular investment option.

What is an ETF?

An ETF is a pooled investment vehicle, much like a mutual fund, that invests in a diversified basket of securities. ETFs typically track the performance of a particular market index, and for that reason, are sometimes referred to as passively managed funds. While structured like a mutual fund, ETFs trade more like stocks. So, purchases and sales are executed at market price throughout the day on the major exchanges. (Mutual funds are bought and sold at their closing price at the end of each trading day.)

What are the key advantages?

One big draw for many investors is ETFs’ relatively low overall costs (expenses are below those of actively managed products). ETFs tend to be very tax efficient (with fewer capital gains distributions), highly liquid (easy to exit and enter at any time) and offer a great deal of transparency (providing daily disclosure of holdings). They can also help investors tap previously hard-to-access asset classes, such as gold and frontier markets.

How can I use ETFs with other funds?

With low costs, access to hundreds of companies and trading flexibility, ETFs can be a powerful addition to your portfolio. ETFs can be particularly useful where the goal is to efficiently access a specific market segment. Say you wish to capture exposure to U.S. equities broadly. You might choose an ETF that tracks the S&P 500. Those positions can be supplemented with mutual funds where you have high conviction in the strategy or the manager’s ability to outperform the broader market, or where you’re targeting a specific investment outcome. So by combining active and indexing, you can gain the exposures you desire, seek a specific outcome and look to mitigate
risks in your portfolio.

How can I access them?

You can purchase ETFs through your existing account, just as you would stocks. We encourage you to explore the options with your financial professional, who can help you furnish your portfolio with ETFs that complement your existing holdings.

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Stock and bond values fluctuate in price so the value of your investment can go down depending on market conditions.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/ developing markets, in concentrations of single countries or smaller capital markets.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments.

Diversification and asset allocation may not protect against market risk or loss principal.

Carefully consider the Funds' investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds' prospectuses or, if available, the summary prospectuses which may be obtained visiting the iShares ETF and BlackRock Mutual Fund prospectus pages. Read the prospectus carefully before investing.

Buying and selling shares of ETFs will result in brokerage commissions.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are those of the BlackRock investment professionals profiled as of May 2014, and may change as subsequent conditions vary. Individual portfolio managers for BlackRock may have opinions and/or make investment decisions that, in certain respects, may not be consistent with the information contained in this report. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

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