ETF: Exchange Traded Funds
What exactly is an ETF (Exchange Traded Fund)?
Exchange traded funds are index funds or trusts that are listed on an exchange and can be traded in a similar fashion as a single stock.
It is a single stock representing a basket of securities underlying the index which can be comprised of stocks, bonds, or other assets such as commodities.
"Funds" are investing vehicles that hold dozens, hundreds, or even thousands of companies under one umbrella unified by a particular investing theme (such as companies that comprise the Dow Jones Industrial Averageor ones whose main business is in the biotech industry).
Like any other publicly traded company, exchange traded fund's have ticker symbols (snappy ones, in fact, like Cubes, Spiders, and Diamonds). But instead of typing "MSFT" to buy Microsoft, for example, you enter "DIA" for the Dow Jones Industrial Trust, or "Diamond" exchange traded fund.
The first exchange traded fund was the S&P 500 index fund (nicknamed spiders because of their SPDR ticker symbol), which began trading on the American Stock Exchange (AMEX) in 1993, which tracks the S&P 500 index and trades under the symbol SPY.
You can pretty much find an exchange traded fund for just about any kind of sector of the market, there are hundreds of them.
For example, if you were interested in the Healthcare Sector, perhaps Vanguard's Health Care Viper (ticker VHT) would be worth looking into.
Does the Austrian market peak your interest? Then take a look at the ishares MSCI Austrian Index fund (ticker EWO).
Or if you'd like exposure to the Internet Infrastructure Sector, then maybe Merrill Lynch's HOLDRs (ticker IIH0) might be for you.
There are also Gold and Silver Exchange Traded Funds.
By owning an exchange traded fund, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share.
Another advantage is that the expense ratios for most exchange traded funds are lower than those of the average mutual fund.
When buying and selling exchange traded fund's, you have to pay the same commission to your broker that you'd pay on any regular order.
To Summarize, like stocks, Exchange Traded Funds:
- are an investment product
- trade on a stock exchange
- can be bought and sold throughout the day during trading hours
- trade at prices that change throughout the day
- are purchased through a full service or discount/online brokerage account
For further in-depth information on Exchange Traded Funds, the book Getting Started In Exchange Traded Funds by Todd Lofton, will show you how ETFs are created, how to evaluate an ETF’s performance, and where to look for an Exchange Traded Fund that best matches your investment objectives.
In addition, it will also provide you with some help in actual day-to-day buying and selling. It will demonstrate how to use basic technical analysis to forecast probable movements in Exchange Traded Funds prices, explain how options work, and options on Exchange Traded Funds can be used to enhance success. The book will review the importance of good money management, outlining the steps that you can take to curtail losses and let profits run.
Next: Types of Exchange Traded Funds
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