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What is an ETF?
Diane Goettel
Diane Goettel
An ETF is a shorthand term for an “Exchange Traded Fund”, which is a type of investment that is based in the stock market. An ETF is an investment plan that can be traded as shares on many of the stock exchanges around the world. Generally, an ETF works to replicate a standard element within the stock exchange, such as the Standard & Poor 500 index. An Exchange Traded Fund might also try to replicate a specific market, such as the technology market or the automotive market. On the other hand, an ETF might try to model itself after a specific commodity such as oil or silver.
The specific makeup of the ETF and the intricacies of the way that one works are defined differently in different parts of the world. There are, however, some universal elements of an ETF. First of all, an Exchange Traded Fund must have a listing on the stock market exchange and it must be able to trade on a ongoing basis. An ETF can also be recognized by the way that its value is assigned. The value of an ETF is directly relates to the value of the assets of which it is comprised.
The qualities of an ETF offer some particular advantages which, to some investors, make them more attractive than traditional open-ended investments. Because an ETF works on a diversified structure, the cost of the fund is low and so is its turnover.
The shares that make up an Exchange Traded Fund are sold freely in the open market. However, ETF shares are generally only purchased by large investors. Although ETF shares are generally held for a long time before investors cash them in for the turnover, some aggressive hedge funds also make use of ETFs in order to increase their worth.
Some of the most popular Exchange Traded Funds are listed below with their index symbol:
- Standard & Poor's 500 Index Depository Receipts (SPY:AMEX)
- Nasdaq-100 Index Tracking Stock (QQQ:AMEX)
- DIAMONDS Trust (DIA:AMEX)
- iShares S & P 500 (IVV:AMEX)
- Standard & Poor's MidCap 400 SPDRs (MDY:AMEX)
- iShares Russell 2000 (IWM:AMEX)
- iShares MSCI EAFE (EFA:AMEX)
- Total Stock Market VIPERs (VTI:AMEX)
- iShares SmallCap 600 (IJR:AMEX)
- Consumer Services Select Sector SPDR (XLV:AMEX)
If you are interested in investing in an ETF, first consider if this is the best type of investment for your financial profile. Consider consulting with a financial services professional. If you decide that investing in an ETF is the right move for you, you may want to consider some of the above funds.
Diane Goettel
In addition to her work as a freelance writer for SmartCapitalMind, Diane is the executive editor of Black Lawrence Press, an independent publishing company based in upstate New York. She has also edited several anthologies, the e-newsletter Sapling, and The Adirondack Review. Diane has a B.A. from Sarah Lawrence College and an M.A. from Brooklyn College.
Learn more...
Diane Goettel
In addition to her work as a freelance writer for SmartCapitalMind, Diane is the executive editor of Black Lawrence Press, an independent publishing company based in upstate New York. She has also edited several anthologies, the e-newsletter Sapling, and The Adirondack Review. Diane has a B.A. from Sarah Lawrence College and an M.A. from Brooklyn College.
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![An ETF is an investment based in the stock market.]()
By: ScanrailAn ETF is an investment based in the stock market. -
![Although most ETFs are passively managed index funds, in 2008 the U.S. Securities and Exchange Commission (SEC) approved the development of the first actively managed ETF.]()
By: leungchopanAlthough most ETFs are passively managed index funds, in 2008 the U.S. Securities and Exchange Commission (SEC) approved the development of the first actively managed ETF. -
![The shares that make up an Exchange Traded Fund are sold freely in the open market.]()
By: diego cervoThe shares that make up an Exchange Traded Fund are sold freely in the open market.
Discussion Comments
@julies - Another difference between an ETF and a mutual fund is that an ETF will trade throughout the day. If you are investing in mutual funds, they only trade at the end of the day for their net asset value.
I enjoy the action of trading and that is one reason I enjoy trading an ETF. I had some nice returns on an oil ETF recently. This also gives me an overall view of what is happening in the oil industry.
Another advantage of buying an ETF is that they don't report earnings. If you have ever lost a lot of money on a stock that had poor earnings, you know how much this can hurt your portfolio.
With an ETF I still need to keep a close eye on what is going on, but I don't have to be so concerned about bad earnings wiping out all of my profits overnight.
@julies - You are right when you see similarities between an ETF and a mutual fund, but there are also some important differences.
I trade both, and find that I really enjoy trading ETF's. One of the biggest advantages if you are just getting started is that there are no minimum requirements to invest in an ETF.
When I got started, I had a very small portfolio, so it was much easier to buy an ETF than a mutual fund. You have to pay commission fees when you buy and sell an ETF, but there aren't any sales loads like there are on mutual funds.
If I think a certain industry is going to be strong, I like buying an ETF and diversifying my money over several stocks instead of just one or two.
I am just beginning to learn about stocks and trading, and always wondered what an ETF was. I heard someone talking about trading a gold ETF because he thought that gold was still a good overall market to be in.
Many stocks have not been doing well lately, but he felt that investing in an ETF within the gold and precious metal sector was a safer place for his money.
It sounds like an ETF is similar in structure to a mutual fund because you are able to diversify within one kind of fund. Does anyone know what the differences are between an ETF and a mutual fund?
There are several reasons why I enjoy trading an ETF. I think it helps reduce my risk because I am trading a mixture of many assets at one time, which gives me more of a balance.
Since I can't afford to buy each of the individual funds that is included in the ETF, this is an economical way to be able to do it.
When I am looking to trade an index ETF, I like to use a screener which helps me eliminate those that I can't afford, and also find those that look like they have some good growth potential.
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