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Invest in inverse ETFs in order to short the market![]() |
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| This article is a part of Wikinvest's Personal Finance section and Guide to Investing. Please contribute or edit to improve it. |
You may also be looking for the page on Emerging Markets Telecommunications Fund (ETF)
An exchange traded fund is a mutual fund that trades on an exchange just like a stock. Like Mutual Funds, ETFs are regulated by the SEC under the 1940 Act. It holds a pool of assets: stocks, bonds, futures, or even commodities, like gold.
ETFs are built on sound corporate governance principles: Board of Directors, Compensated management, Highly detailed recordkeeping and audit requirements.
An ETF is priced proportionately to the value of the underlying equities it represents. Mutual funds, work by taking the whole pie and slicing it into equal shares. Each share has the same Net Asset Value (NAV).
However, as opposed to actively managed Mutual Funds, ETFs track and hold a known and fully disclosed basket of stocks, usually an index. ETF shares trade directly on a stock exchange. Just like stocks, investors experience commissions and bid/ask spreads. Just like mutual funds, fund sponsors get paid a management fee.
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)
(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)
Categories: Guide | Definitions | Mature | ETF
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