Business, Legal & Accounting Glossary
An Exchange Traded Fund (ETF) is a type of security that performs much like an index fund but is traded on a stock exchange. Typical ETFs look to provide a similar return to that of a particular market index, but other types (Leverage ETFs, Inverse ETFs) try to mirror daily returns of a securities index. Actively managed ETFs are more transparent by publishing their portfolio holdings on a daily basis.
An exchange-traded fund (ETF) is an investing vehicle that holds a group of stocks and can be traded on major stock market exchanges like a stock.
An exchange-traded fund (ETF) is a pool of stocks or commodities trading as a single stock on a stock exchange.
Hence the name exchange-traded fund. Unlike mutual funds, an exchange-traded fund may be bought on margin, sold short, traded intraday, or in any other way traded like a stock. As with stocks, investing in an exchange-traded fund will incur trading costs. Often, an exchange-traded fund will mimic a stock index; popular exchange-traded funds are the DIA (mimics the Dow Jones Industrial Index) and the QQQQ (mimics the NASDAQ 100). Other exchange-traded funds can track specific industries, regions, or investing styles.
Exchange-traded fund family examples are iShares, VIPERs, and SPDRs. Exchange-traded fund shares can be sold in the secondary market or large shareholders (i.e. institutions) can redeem for stock held by the fund itself, which can help investors in an exchange-traded fund avoid capital-gains taxes.
If you’ve ever invested in a mutual fund or index fund, then you know that there is only one time per day when you can buy or sell those shares — the end of the day after the market closes. That’s because the mutual fund calculates is net asset value (NAV), which is the “share” price, by noting the closing price of all the securities it holds after the markets close.
However, if you want to trade shares of an index during the day, then the ETF is for you. These are like index funds in that they own shares of the companies that make up the index, but whose own shares can be purchased or redeemed in real-time during normal market hours.
When these were first introduced in the early 1990s, the SPDR (“spider”) (ticker SPY) which tracks the S&P 500 index was the first in 1993, they tracked major indexes. But as their popularity has grown, the indexes that these follow have narrowed and specialized so that nowadays you can purchase an ETF and be exposed in an instant to just about any sector or sub-sector of the economy. Want only gold mining? There’s an ETF for that. Want only Brazilian companies? There’s one for that, too.
While such diversity makes it easier for investors to become diversified into specific sectors, the specialization can increase risk just as much as buying individual stocks by concentrating a portion of your portfolio into one particular industry or portion of it. So use these with care, Fool.
Investors trying to decide between an ETF and a similar mutual fund should consider the costs in his particular situation. When held in a brokerage account, some brokers charge transaction fees for mutual fund transactions. Those fees are often much higher than discount broker commissions. Hence, they can make mutual fund ownership costly. But when held in an account at a mutual fund company, the fund company often provides account services at no additional charge. The services are paid for by the fund expense ratio. Most brokers have a list of funds with no transaction fees, though that list can be limited compared to the number of funds available. Some brokers now advertise free commissions for ETF transactions. Some mutual fund companies charge annual account maintenance fees for accounts below specified minimums. Investors should consider all costs for the investments they plan and choose accordingly.
One should also note that most ETFs are not managed. You are buying a security composed of a collection of stocks purchased at a fixed ratio. If market conditions change for some of those stocks, your only option is to sell the ETF. Fund management rarely changes the composition of the ETF.
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This glossary post was last updated: 5th August, 2021 | 7 Views.