Exchange Traded Funds

What is a ETF?

There is no need to be afraid of ETF’s,  short for Exchanged Traded Funds they are very similar to mutual funds.  With the big difference being they are traded on a stock exchange as the name implies. The funds themselves often mirror a stock index like the S&P 500, but they can contain bonds, commodities or foreign assets depending on the goal of the fund.

Why Do People Buy ETF’s?

The ease of buying and selling ETF’s has made them very popular with investors. Many ETF’s are very liquid with high volumes of buyers and sellers daily.

ETF’s are a great way to invest in commodities like gold and oil without owning the underlying asset. Many investors also prefer to invest in the index as the majority of fund managers are unable to beat the index in the long run.

Management Fees (MER) are usually lower than most mutual funds as many ETF’s like those that mirror a index require very little daily management compared to mutual funds.

Because ETF’s trade on the open market where there are supply and demand factors involved, ETF’s can sometimes trade at a discount to their net asset value (NAV) creating value for bargain hunters and those looking for arbitrage opportunities.

ETF’s can also be used to hedge against risk, specially if you think the market will fall in the short term but do not wish to sell because you are bullish with the long term prospects of your investment. You could purchase a ETF that shorts a financial index if you own financials and fear a short term sell off. Of course this will not work if your portfolio vastly under performs the index and will cut into your profits if the index continues to go up along with your stocks.

In some instance ETF’s can have additional tax savings and lower broker related fees.

As ETF’s have become more popular the number of ETF’s available continues to grow. Some have become more exotic where they mirror or short a index x2. Meaning your exposure is double what the index is, so theoretically if the index moves 2.5%+ in one day a ETF should go up 5%.

List Of Exchange Traded Funds (ETF’s)

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)

For a more complete list see nadaq.com or nyse.com