Exchange Traded Fund (ETF)

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Send the authors a comment or suggestion there needs to be an examination and comparison between etf providers and also one on etf timers ... more [Dismiss] [Done] there needs to be a user-friendly chart library for etfs that is easily manipuable and printable. [Dismiss] [Done] please include a discussion of the tax advantages and efficiencies unique to etfs [Dismiss] [Done] See All Suggestions

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An exchange traded fund is a basket of equities (such as stocks or bonds) that trades on the market just like a single stock would. An ETF is priced proportionately to the value of the underlying equities it represents. It provides a very easy way for the average investor to get a specific set of equities without the overhead of purchasing each equity separately. The makeup of the 'basket' that a given ETF represents is determined when the ETF is established, and cannot change. For example, the iShares Russell 1000 Index Fund, ticker symbol IWB, tracks the stocks listed in the Russell 1000 Index. Indeed, plotting the two side-by-side shows a near perfect track in terms of performance (similarly, the iShares S&P 500 ETF, IVV, against the index shown below)

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[edit] Characteristics of ETFs

• Many ETFs have the key benefit of relatively low expense ratios. Because ETFs follow a set of predetermined rules, there is no research team or expensive fund manager to pay to make active decisions about the contents of the fund. Thus, ETFs are passively managed funds.

(Note the bid-ask spread on your ETF at purchase: long-term investors can focus on the expense ratio alone, whereas actively trading investors may wish to consider the premium they're paying for a less-liquid ETF like VEA versus the well-known EFA)

• ETF's are more portable than most mutual funds. Portability allows an individual investor to switch financial advisors without incurring the tax cost and transaction costs of selling and buying proprietary mutual funds. Practically all advisor platforms handle ETFs since they trade identically to individual stocks.

[edit] Kinds of ETFs

• International ETFs are a way for investors to diversify internationally. Many mutual funds are benchmarked against similar US indexes. For example, Dodge and Cox International Stock fund (DODFX), when measured against US index like the S&P 500 or even large value funds like the Russell 1000 Value Index (the iShares tracker is ticker symbol IWD), DODFX has out performed them.

By using ETFs to access international equities, investors also gain the flexibility of using these freely traded securities, to enter and exit the international markets at times when they aren't open. There are hidden costs associated with this "artificial" liquidity that are built into the cost of the ETF share itself.

Finally, US investors are able to enter and exit positions in international equities using only US dollars. There are no conversion fees incurred by first trading currency into the local market currency before investing. Regardless of the currency used for the underlying basket of international equities, the ETF is priced in US dollars.

• Commodities ETFs hold a commodity as their underlying asset, allowing an investor to invest in the commodity. For example, a gold ETF would have physical stockpiles of gold proportional to the value of its outstanding shares. Several ETF fund families such as PowerShares and Adelante Shares have brought out shares which correlate to the price of individual commodities or baskets, such as the PowerShares DB Agricultural Fund (DBA) which reflects the prices of four of the most widely traded agricultural commodities: corn, wheat, soybeans and sugar. Other Commodity ETF's include Real Estate ETFs - REITs and Currency ETFs.

• Index ETFs public indexes as benchmarks to invest the money to meet objectives, such as current income or capital appreciation. Index ETFs are similar to traditional index mutual funds, that allow investors to trade a portfolio of securities in a single transaction.^[1].

[edit] References

1. ↑ ETF Connect Education

[edit] ETFs on Wikinvest