ETF stands for Exchange Traded Fund. ETFs are a recent innovation in the world of investing. ETFs are a special kind of security that grants you ownership over a collection of individual stock certificates. ETFs are approved by the SEC and are then available to the public as investing vehicles. How do ETFs work? Why are they better than mutual funds? A mutual fund is simply a pool of money that the fund manager then invests in stocks, bonds, or other securities. The fund manager makes the decisions, based upon the goals of the fund (ie, what kind of sectors it can invest it, how much it can hold in cash, how much it can invest internationally, etc.). The fund managers buy and sell different positions throughout the year, while their actual holdings are only published quarterly (otherwise anyone could "copy" the investment choices of some hot manager). This means that at any given time, you (as an investor) really have no idea what makes up the portfolio of the fund - what companies it is investing in, and how much it holds of each.
ETFs are not like this. They specifically state what industry they are investing in and what securities they hold and in what quantity - this is all publicly available at all times, so there is no mystery involved. Mutual funds also cannot be traded during the day, since they are only valued at the end of the day after all the underlying securities they hold have been valued at that days closing price. So you can only trade (buy or sell) a mutual fund at the end of a market close - not during the day. ETFs are not like this either. They are constantly valued based on their underlying holdings, and can be traded any time of the day when the market is open (hence the name, exchange TRADED funds). The last major difference is in fees.
Mutual funds tend to charge annual fees between 1-2%, which goes to pay the managers running the fund and making the investment decisions. ETF fees are a fraction of that, sometimes as low as .1%. Over the course of a few years, this can add 5% or more to your returns that otherwise would have been burned up in mutual fund fees. ETFs can also be margined and options can be bought and sold, just like regular securities.
Where can you buy or invest in ETFs? They are bought and sold just like stocks, and should be available through any brokerage house, including all the online brokerages - Charles Schwab, Fidelity, Vanguard, etc. Are ETFs safe? ETFs are authorized by the SEC, so they are essentially as safe as any mutual fund. However, their value depends on the value of the securities they hold, which can go up and down at any time, so the value of your ETF will change as the value of the underlying securities change.
ETF List - Best ETFs
There are now ETFs that cover just about all asset classes and sectors. Some of the most famous are the QQQQs which track the NASDAQ and the Spyder (SPY) that tracks the S&P 500 and the Diamonds (DIA) that tracks the Dow Industrial Average. There are gold ETFs, real estate ETFs, energy ETFs, bond ETFs. You can also find ETFs based around:
You can check out ETFZone.com for more information, or go to Yahoo Finance and check out their ETF Center. They list all available ETFs by name, return (daily, 3mo, 1yr, 3yr), avg. market cap or PE of its holdings, and much more. You can also quickly see the expense ratio they charge and the annual turnover (amount of trading) they do. This is a good starting place if you are looking for a particular type of ETF - you can get some stock symbols to check out and research. Some of the popular families of ETFs include: iShares, Vanguard World Funds, streetTracks Series Trust, Powershares ETF, Select Sector SPDR, Rydex ETF, and BLDRS Index Funds.
So what's the hottest ETFs this year? iShares Latin America ETF was sitting up 83% as of this writing, while the Energy Select Sector SPDR was up 56% and BLDRS Emerging Market ETF was up 55%. Hot the last few years is the iShares MSCI Austria ETF and the streetTracks Wilshire REIT ETF.
If you find yourself wanting more, check out "The ETF Manual" by G. Gastineau - though aimed more at investment advisors and financial professionals.
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