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What are ETFs? How do ETFs work?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.
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 ETFsThere 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:
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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