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What are Exchange Traded Funds? |
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ETFs, or exchange traded funds, are like mutual funds, but they trade throughout the day, just like stocks. You don't need a special broker, you don't need a margin account, you don't need to give your broker any special instructions. You trade just the way you always do, whether on your computer or over the phone. You just provide the ticker symbol and say buy or sell, exactly like a stock. There are no special commission prices, and no fees to get in or out. They are FAR less expensive funds to use than mutual funds, and they trade throughout the day, just like any other stock.
You can get all the diversification you want, buying funds that represent special niche industries or broad market indexes. You can buy funds that represent any of the major indexes in most countries! There are numerous Asia funds, Europe funds, Latin America funds, etc.
Typically, exchange traded funds try to replicate a stock market index such as the S&P 500 or the Hang Seng Index, a market sector such as energy or technology, or a commodity such as gold or petroleum.
However, as Exchange traded funds proliferated in 2006 from under one hundred in number to almost four hundred by the end of the year, the trend has been away from these simpler index-tracking funds to intellidexes and other proprietary groupings of stocks.
Many current U.S. Exchange traded funds are based on some index; for example, SPDRs (Standard & Poor's Depository Receipts, or "Spiders", ticker symbol SPY) are based on the S&P 500 index. The index is generally determined by an independent company; for example, Spiders are run by State Street, while the S&P 500 is calculated by Standard & Poor's. Sometimes, a proprietary index is used.
A series of exchange-traded funds introduced by ProShares in 2006-07 no longer follow the traditional definition. These funds, while correlating to the performance of the S&P 500, NASDAQ 100, DJIA, and S&P 400 Midcap, do not attempt to merely achieve the same return as the underlying index. These forty funds attempt to either achieve the daily performance of the designated benchmark times two, times negative one, or times negative two. They are ETFs with integrated leverage.
Today Exchange traded funds present a viable alternative investment option to traditional open-ended mutual funds, especially open-ended index funds. There are many available ETFs that attempt to track all kind of indexes based on market cap (such as large-cap, mid-cap, small-cap, etc), style (such as value and growth), industries, countries, precious metals and other commodities and more are being developed.
Exchange traded funds also enable people living outside the United States to participate in US based funds. Traditional open-ended US mutual funds are available only to US residents, whereas anyone in the world can purchase shares in an ETF that trades on the open market.
See also
What is an ETF?
What is an Exchange Traded Fund?
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