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Exchange Traded Funds, also known as ETFs, are index funds traded on
the major stock exchanges just like stocks. An index fund involves a
collection of securities, much like mutual funds, except that ETFs
differ from mutual funds in some distinctive ways. They are traded
like stocks but investors get the benefit of diversification in
their investments bundled into one security. However, where mutual
funds have a net asset value, or NAV, that is calculated daily, ETFs
experience fluctuations in price throughout the course of the day.
You also have the opportunity to purchase just one share and the
expense ratios tend to me lower than with a mutual fund.
There are Exchange Traded Funds that are based on
all of the major stock indexes such as Dow Jones Industrial Average,
Standard & Poor's 500 Index and Nasdaq Composite. Companies of every
size and type have ETFs as well as investment trusts, gold, bonds
and international stocks. When you get down to it, though, ETFs are
still inherently index funds. It is important that anyone who is
considering trading ETFs take the time to study and understand the
nature and characteristics of index investing. With index investing,
buying the market is preferred over picking individual stocks. The
main difference, though, is that investors do not need to approach
ETFs with the attitude that they will buy the fund and hold it. It
is possible to trade them much like stocks. Hedge funds and day
traders are gravitating toward ETFs because of their ease and many
benefits.
Index ETFs
Index ETFs are basically regular exchange traded funds. They have
rules that are very clearly defined regarding ownership and these
rules are adhered to no matter the condition of the market. It is
not required that the fund follow a well known index.
 Advantages
of ETFs
In addition to the lower annual expense ratios, ETFs aare much more
tax efficient. ETFs also have continuous pricing. They are priced
and can be sold and purchased throughout the trading day just like
stocks. Trading fees for ETFs are lower and cash equitization is
better than other investments. A portfolio manager can invest cash
efficiently and quickly because ETFs offer a high correlation to
their benchmark. ETFs allow investors to maintain more efficient
portfolio transitions. Often an investor will move their assets
between different investment styles and funds but they still want to
be fully invested in the market. ETFs can also offer portfolio
managers the opportunity to get exposure in a particular sector.
Risks Involved with ETFs
All investments carry some sort of a risk and ETFs are no different.
The supply and demand of the market determines the market share
price as opposed to the net asset value determining the price. There
is ample room for tracking errors because of various factors that
are consistent with the ETF's characteristics. The fluctuations of
the market prices can create a market risk as well as an interest
rate risk.
ETFs can be a viable option for investors who want a security that
is a little more exciting than a mutual fund, but somewhat safer
than a regular stock. If you wish to invest in ETFs, do your
homework and learn the ins and outs so that you can emerge onto the
playing field with a solid understanding of the game..
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