What Is an Exchange Traded Fund (ETF)

An Exchange Traded Fund (ETF) is a type of investment fund that is traded on stock exchanges. This type of fund is similar to stock, and holds assets at about the same price as the net asset value.

The first ETF in the business was introduced in the early 1990s and were called Spiders (SPY). This ETF tracked the S&P 500 index. The QQQ’s (QQQQ) came a few years later and this tracked the 100 largest non-financial companies on the Nasdaq. Some of the biggest players in the ETF market today include State Street Global Advisors, Barclay’s Global Fund Advisors and Vanguard. Of course there are many types of ETFs, and they can track everything from the United States stock market to just parts of the stock market, like large or small stocks or specific industries. ETFs even track foreign markets, individual countries, and commodities.

There are hundreds of ETFs to choose from. An Exchange Traded Fund combines the valuation feature of mutual funds (the same kind that can be bought or sold at the end of each day for a net asset value) with a tradability feature of a closed-end fund (the type that trades throughout the day with prices different than the net asset value). Closed-end funds are not actually ETFs even though they are all traded on an exchange.

ETFs offer investors a chance at undivided interest (with simple and lucrative operation like traditional mutual funds) with a little bit extra protection: ETFs can be bought and sold every day like stocks, just as you would find with a broker-dealer. Another difference is that Exchange Traded Funds do not sell or redeem shares at net asset value. Therefore, financial institutions purchase and sell ETF shares in large blocks, which can run anywhere from 25,000 to 200,000 shares.

ETFs offer other advantages such as easy diversification, lower expense ratios, and better tax efficiency (due to their index fund-like operation). ETFs are less expensive than other financial products because of the lack of management and because of fewer expenses in meeting shareholders purchases and redemptions, as well as lower marketing costs. They are also very flexible in terms of buying or selling. Because they are publicly traded, shares for ETFs can be bought on margin and sold short. Investors can also take advantage of hedging, stop orders and limit orders. Options are also traded on most major ETFs.

You may want to look into the flexible and potentially lucrative market of Exchange Traded Funds, especially if you are just starting to invest your own money. They may look and act like stocks but they give you a whole world of opportunity, as they combine the best features of many different types of funds.

As ETFs become more and more popular several mutual funds and hedge funds are beginning to have ETFs are part of their portfolios.

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