Investing in the market quickly and inexpensively is made easy through Exchange-Traded Fund or ETF. This is an investment tool bartered in exchange of major assets such as stocks and bonds. It is traded just about the same price as the net asset value of its underlying assets through out the trading day. These are also index funds that help investors focus on what asset classes to choose.
ETFs follow a certain index. Some of which are Dow Jones Industrial Average or Dow 30, Standard & Poor’s 500 Index and Nasdaq Composite. Dow 30 is a compilation of indices in gauging the performance America’s stock markets. S&P’s 500 contain 500 large-cap corporations which are mostly American. Nasdaq, on the other hand has 3000 components and serves as an indicator in measuring the performance of companies inside and outside the United States territory.
In March 2008, 67% investment professionals said ETF is the most innovative investment means in the last 20 years. ETFs have been existing in the United States since 1993 and in Europe since 1999.
Exchange traded funds are classified into open-end companies and United Investment Trust. But there are matters that need to be considered. ETFs are not allowed to sell individual shares directly to investors, but are just allowed to issue shares in large blocks called as Creation unit. Those who can just avail Creation unit are commonly institutions. Investors, hence buy this unit with a basket of securities that are reflected in the ETF’s portfolio. After availing the creation unit, the investor can now buy and sell individual shares. If an investor wants to sell ETF shares, he can either sell individual shares to other investors or sell the Creation unit to the ETF again.
There are actually three kinds of exchange-traded fund: index, commodity and actively managed funds. Index funds monitors performance of a securities index through its portfolio. The commodity fund, on the other hand do not track security indexes but is plainly focused in investment on commodities such as metal and gold. The last kind will be the actively-managed ETF are published on websites and are updated daily.
Exchange traded funds have these advantages which serves as reference for an investor to weigh if he will go for an ETF or not. Typically, ETFs have lower marketing, promotion, distribution and accounting expenses. They are tax-efficient and are usually diversified because of more market exposure and have lower costs. The prices of ETFs are also made transparent to clearly monitor prices all through out the day.
In contrast, exchange-traded funds are far different from the traditional mutual funds. In mutual funds, transactions normally happens when markets are about to close. The prices mutual funds gain depends on the sum of the prices contained in the stocks. Unlike with exchange traded fund, it allows the investor to impose or lock prices for the underlying stocks any time of the day. ETFs are also very economical. In fact, the annual fees incured by ETFs is just .09% compared with mutual funds which has 1.4%.