What Are Exchange Traded Funds
Exchange Traded Funds are rapidly changing the landscape of investment portfolios for both individual and professional "smart money" investors.

ETFs, or exchange-traded funds, are a progressively popular type of investment choice, which resemble mutual funds but trade throughout the day similar to individual stocks. They are index-based, constituting baskets of stocks, bonds or other assets. Exchange Traded Funds are frequently lower-cost than corresponding index-based mutual funds.

You will find that ETF's provide an ample diversity of investment possibilities, from broad based U.S. and global markets to narrow market sectors, geographical regions and individual countries, as well as assorted investment styles. Because they afford an easy means of instantly assuming a diversified market position in an economic and efficient manner, ETFs are developing quickly, driven by demand from both individual and professional investors.

The first exchange-traded fund (ETF) was approved by the SEC and launched in 1993. As of April 2007, assets invested in U.S. Exchange Traded Funds totaled just $466 billion, compared to about $10.5 trillion for mutual funds overall, but total assets invested in ETFs grew 40% in 2006, versus 17% growth for mutual funds. Presently, there are over 400 ETFs approved by the SEC and trading, and numerous others awaiting approval.

Growth in the ETF marketplace is being driven by both individual investors, who appreciate the lower costs and tax advantages, and professional investors, institutional investors, hedge fund managers, and even mutual funds who view ETFs as powerful, flexible instruments for implementing their portfolio strategies.

Exchange Traded Funds are simple to buy and sell through a standard brokerage account, as they trade on an exchange just like a stock. As such, ETFs operate in a very different manner than mutual funds. When you purchase mutual fund shares, you are purchasing directly from the fund company. That company receives your cash deposit, which it uses to purchase individual securities that make up that fund, and issue you a number of shares based upon the fund's current net asset value. You may later withdraw your money from the mutual fund, at which time your shares are ‘redeemed’ by the fund based based on the Net Asset Value of the securities.

ETF shares, also represent fractional ownership of a basket of securities. However, rather than buying or redeeming shares directly from the fund sponsor, they are bought and sold on an open exchange from a ‘market maker.’ These market makers can create or redeem blocks of shares of the ETF ('creation units') anytime they want, based on the index composition determined by the fund sponsor, by buying or selling the underlying securities. They can also buy or redeem large ETF share blocks directly from the fund sponsor, tendering or receiving the underlying securities in return (an 'in-kind' transaction, which is what makes ETFs tax-efficient).

ETFs are approved and regulated by the The Securities and Exchange Commission. See the SEC's ETF information page for information on specific legal structure of ETFs.

by TheOptionClub.com -

Back to Top

###