Back to Investing: ETFs
This is a short article (explanation) about ETFs I wrote for the Alaska Chapter of Better Investing annual newsletter. It also updates my mutual fund lecture---class starts the 23rd.
ETFs
ETFs are growing in number and diversity. Advertisements for them are bombarding us from all directions. "So, what are they?"
Exchange Traded Funds (ETF) are a hybrid. They combine features of a mutual fund with those of an individual stock. An ETF looks like a mutual fund but trades like an individual stock.
Like a Mutual Fund
- An ETF is a basket of either individual stocks or bonds or commodities or real estate trusts that comprise a specific index.
- You own shares of the ETF, not shares of the individual stocks in the ETF.
- It has an expense ratio, usually much lower than that of a mutual fund.
Like an Individual Stock
- You can buy and sell shares throughout the day--intraday trading with real time pricing.
- You buy and sell shares through your brokerage account at your usual brokerage commission rate.
- You can buy an ETF on margin, sell it short, and use stop and limit orders
- It trades between investors.
Its Unique Characteristics
- An ETF replicates the performance of its index by owning all the stocks that make up that index.
- It is designed to match the index, not to out perform it.
- An ETF is passively managed. Changes are made only when the underlying index adds or deletes a stock.
The index the ETF replicates can be a broad index such as the Russell 2000, a small-cap index, or a narrow index such as the Dow Jones Industrial Average with 30 large-cap stocks or an index that covers a particular sector of the economy, such as oil and gas exploration, technology, or biotech. Thus, ETFs offer portfolio diversity and trading flexibility.
You can choose from more than 500 ETFs. Three well-known ETFs are:
1. Spiders (SPDR) which mirrors the S&P 500
2. DIAMONDS (DIA) which tracks the Dow Jones Industrial Average
3. Qubes (QQQQ) which parallels the Nasdaq 100 index.
For more information about ETFs, go to BetterInvesting.org, finance.yahoo.com, MorningStar.com, and SmartMoney.com.
7:59:14 AM 
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