Mar 31, 2009

What are ETFs ?

What exactly are ETF's?

Introduction
Exchange-Traded Funds, or ETFs, are basically like mutual funds that trade on stock exchanges, with a few significant differences. They have many of the benefits of stocks while removing some of the downsides that mutual funds have.

Purpose of ETFs
Have you ever wanted to buy shares of an index like the Dow Jones Industrial Average? You can't do that directly but you can do it indirectly through ETFs. Those who supervise ETFs typically invest in the same stocks or futures that make up an index or commodity in an effort to make the ETF's value per share track a certain index or commodity up and down. This allows traders with access to stock trading the ability to easily trade indexes or commodities indirectly.

Example: SPY - SPDR Trust Series I:

One of the most actively traded ETFs is SPY, who's goal is to track the price and performance of the S&P 500 index. It will not be the same price as the index but its chart should have the same shape as the index, within a small percent most of the time.

Example: QQQQ - PowerShares QQQ Trust, Series 1:
The goal of this ETF is to track the Nasdaq 100 index by buying and selling shares of all the stocks that make up Nasdaq 100.

Example: EEM - iShares MSCI Emerging Markets Index Fund:
This ETF looks to track the price and performance of the MSCI Emerging Markets index, which tracks performance of international stocks. This fund is non-diversified. This means it is more risky as other ETFs because it targets a specific sector.

Example: USO - United States Oil Fund LP:

This commodity ETF tracks the price and performance of oil, West Texas Intermediate light, andsweet crude oil. This is accomplished by continually trading futures contracts for oil, natural gas, and several other things. It is also non-diversified but a very convenient way to invest in oil prices.

Benefits of ETFs
The princible benefits of ETFs include diversity, the same tradability as stocks, low costs, tax efficiency, and transparency of assets.

What are ETFs
ETFs are somewhat complicated to explain, but they are funds that can be structured in a few different ways. They are usually passively managed, which means the managers do not have to constantly decide which investments need to be bought and sold in order to increase the value of the fund. Instead, the managers simply have to make sure the fund tracks a certain index or commodity as closely as possible, which can be as simple as owning the stocks that make up an index and adjust the shares accordingly so that the price follows the index's chart.

Where to Find Them
There is more information about specific ETFs at brokerages, offer a free stock screener, along with an ETF screener. Yahoo! Finance has a good one that lets you view a list of the best performers in several different categories.

For detailed information on how the market works you can visit: http://HowTheMarketWorks.com.


About the Author: Nicholas Swezey is the designer of the Free Stock Market Game at http://HowTheMarketWorks.com. He is a regularly published expert on issues related to the stock market. http://HowTheMarketWorks.com has been a overwelming success}} over the last year almost doubling the number of visitors monthly with over 600 new members daily.

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