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Exchange Traded Funds, also known as ETFs, are index funds traded on the major stock exchanges just like stocks. An index fund involves a collection of securities, much like mutual funds, except that ETFs differ from mutual funds... See more » Exchange Traded Funds, also known as ETFs, are index funds traded on the major stock exchanges just like stocks. An index fund involves a collection of securities, much like mutual funds, except that ETFs differ from mutual funds in some distinctive ways. They are traded like stocks but investors get the benefit of diversification in their investments bundled into one security. However, where mutual funds have a net asset value, or NAV, that is calculated daily, ETFs experience fluctuations in price throughout the course of the day. You also have the opportunity to purchase just one share and the expense ratios tend to me lower than with a mutual fund. Unlike investing in penny stocks, you are diversified. There are Exchange Traded Funds that are based on all of the major stock indexes such as Dow Jones Industrial Average, Standard & Poor's 500 Index and Nasdaq Composite. Companies of every size and type have ETFs as well as investment trusts, gold, bonds and international stocks. When you get down to it, though, ETFs are still inherently index funds. It is important that anyone who is considering trading ETFs take the time to study and understand the nature and characteristics of index investing. With index investing, buying the market is preferred over picking individual stocks. The main difference, though, is that investors do not need to approach ETFs with the attitude that they will buy the fund and hold it. It is possible to trade them much like stocks. Hedge funds and day traders are gravitating toward ETFs because of their ease and many benefits. Index ETFs Index ETFs are basically regular exchange traded funds. They have rules that are very clearly defined regarding ownership and these rules are adhered to no matter the condition of the market. It is not required that the fund follow a well known index. Advantages of ETFs In addition to the lower annual expense ratios, ETFs aare much more tax efficient. ETFs also have continuous pricing. They are priced and can be sold and purchased throughout the trading day just like stocks. Trading fees for ETFs are lower and cash equitization is better than other investments. A portfolio manager can invest cash efficiently and quickly because ETFs offer a high correlation to their benchmark. ETFs allow investors to maintain more efficient portfolio transitions. Often an investor will move their assets between different investment styles and funds but they still want to be fully invested in the market. ETFs can also offer portfolio managers the opportunity to get exposure in a particular sector. Risks Involved with ETFs All investments carry some sort of a risk and ETFs are no different. The supply and demand of the market determines the market share price as opposed to the net asset value determining the price. There is ample room for tracking errors because of various factors that are consistent with the ETF's characteristics. The fluctuations of the market prices can create a market risk as well as an interest rate risk. ETFs can be a viable option for investors who want a security that is a little more exciting than a mutual fund, but somewhat safer than a regular stock. If you wish to invest in ETFs, do your homework and learn the ins and outs so that you can emerge onto the playing field with a solid understanding of the game. Filed under stocks by bob See less »

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Exchange Traded Funds, also known as ETFs, are index funds traded on the major stock exchanges just like stocks.

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