Exchange Traded Funds Basics

Exchange traded funds, or ETFs, are securities that track on an index, a commodity, or a basket of assets like an index fund, but that trades like stock on the major stock exchanges. The first and most widely known ETF is called the Spider (SPDR), which tracks the S&P 500 index and trades under the symbol (SPY). All of the major stock indexes have ETFs based on them, including the Dow Jones Industrial Average, the Nasdaq composite, and the Standard and Poor’s 500 Index, the American Stock Exchange (AMEX) and the New York Stock Exchange (NYSE). In fact, most ETFs are currently traded on the American Stock Exchange. Currently there are about 700 ETFs, and they are quickly gaining in popularity.

ETFs typically offer low expenses, are easy to use, and provide the investor with the ability to diversify their portfolio. There are ETFs for gold, international stocks, bonds, large U.S. companies, small companies and real estate investment trusts. Basically if there is not already an ETF for the asset class you choose to invest in, there will most likely be one soon enough. Since ETFs trade like stocks and looks like a mutual fund, the difference in structure between ETFs and mutual funds explain part of the different investing characteristics. ETFs performance tracks an underlying index, which the ETF is designed to replicate and because they are designed to track an index they are considered to be passively managed, while most mutual funds are considered actively managed. From an investor’s perspective, an investment in an index mutual fund and an ETF that tracks the same index would be considered equivalent investments.

ETFs can trade instantly all day long and allow the investors to lock in a price for the underlying stocks immediately, unlike mutual funds that take orders during trading hours, but the transactions occur at the close of the market. When owning an ETF, investors can obtain diversification of an index fund and the ability to sell short, buy on margin, and purchase as little as one share. ETFs are basically index funds in their structure however investors must not be passive and take the buy and hold approach. For this reason investors interested in ETFs are encouraged to study everything about index investing.

Additional types of ETFs include sector ETFs, currency ETFs, style ETFs, and actively managed ETFs. These and other types of ETFs will be discussed in further detail in future postings under the exchange traded funds (ETFs) section of this site.

Please also read about the use of Japanese Candlesticks and other forms of technical analysis that are useful investing tools as well. You can learn about the major signals such as the doji candlestick chart, the bearish engulfing pattern, the inverted hammer candlestick as well as other secondary candlestick patterns. In addition to these patterns, you can also learn about technical indicators such as moving averages and the different types of moving averages that are available to investors.

Continue your education and read about the index exchange traded fund (index ETF).