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Exchange Traded Funds (ETFs)

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Much like a Mutual Fund an ETF is a "basket" of stocks assembled together to meet an investment objective and then split up and sold in shares. That objective is to achieve the same rate of return as the underlying stocks or a specific market index. An ETF trades like a stock, unlike Mutual Funds which change value only once per day at the end of trading hours. ETF prices fluctuate instantaneously in real-time depending on market demand throughout the day as a reflection of the changing values in their underlying assets. During trading hours the price of each share of an ETF moves up and down continuously. An ETF allows you the diversity of an index fund and the flexibility of a stock. You could purchase shares of an ETF at 9am for one price and again at 3pm for another price. This liquidity along with lower fees makes them advantageous over Mutual Funds. Annual fees for holding ETFs are usually around 0.9% of assets. Mutual Funds have average fees around 1.4% of assets.

One of the most well known of the ETFs is called the SPDR (Spider) which tracks the S&P 500 Index. Having an ETF in your portfolio is one way to trade a group of funds you might not normally be able to purchase. ETFs have no minimum investment. There are a wide variety of ETFs that include international funds, commodities, country specific funds, global funds, and sector specific funds.

ETF Key Points:

ETF can be purchased just like a stock using any brokerage account.
ETFs have lower management fees
ETFs can be traded in real-time just like stocks. Mutual funds can only be sold at the closing price (end of trading day).
All ETFs are approved and regulated by the SEC (Securities and Exchange Commission).
Because of the way they are redeemable they can not be called Mutual funds.
ETFs have annual operating expenses and shareholder fees, typically expenses are low.

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User Comments

Just read an article in the Economist that says ETFs are growing like mad. The money is pouring into them.

Posted by Sid V. on 9/28/06, 10:14 AM

I just bought some ETF's for my IRA through my Ameritrade online account. It was just as easy as buying a stock. All I had to do was enter the ticket symbol the number of shares and buy em.

Posted by Anonymous on 9/28/06, 10:13 AM

The only current drawback to ETFs is they can't be actively manage like Mutual Funds. The managers can change the basket of stocks very easily because they have to be backed by real stocks on deposit. i.e. it's hard to tracks changes to the mix.

Posted by Jeff on 9/15/06, 11:19 AM

Money is pouring into ETFs faster than mutual funds. It's likely that they will replace mutual funds (make them obselete) someday soon.

Posted by Nicole D. on 9/15/06, 11:18 AM

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