Exchange Traded Funds (ETF) started in 1993. Provides an investor, means of investing into an index that follows a particular sector such as the NASDAQ – 100, Standard & Poors (SP) 500, Dow Jones weighted 30 stock average, large or small capital value growth stocks or bond index. A further classification of ETF categorized into three types of funds. Broad – Based which invests into different industries, such as those in the Standard and Poors 500 index. Sector Funds – invests into a particular sector such as healthcare, biotechnology or oil related investments. For example the Petroleum Resource Fund (PEO), that invests in oil related companies. International fund that purchase stocks or bonds of a specific country. For example the First Israel Fund (ISL), that invests in Israel companies.
Shareholders of an ETF are entitled to receive, dividends and capital gains, when available for distribution. The dividends and capital gains usually can be reinvested to receive additional shares, without any brokerage commission or charge. The ETF can be bought, and sold any time when financial markets are open for trading, through a stockbroker. Certainly can be traded intra day. Any Exchange Trade Fund can be purchased for any retirement account. Also, can be purchased or sold on margin. When purchasing an ETF prudent to compare brokerage commission charges to pay the lowest fee.
A prospectus can be obtained from any Exchange traded Fund. If an investor believes a certain sector of the economy will out perform other sectors, then investing into an ETF that specializes in that industry, could provide a substantial return on the investment during a period of time. Investors can diversify their portfolio by purchasing different exchange traded funds, in different industries rather then investing a limited number of companies. However, if a sector of the economy performs poorly, the underlying stocks or investments in the Exchange Traded Fund will probably decrease in value. That will depend, on the how management of the fund, was able to reduce any losses or hold a large cash position. Exchange Traded funds are listed in financial periodicals, local newspapers, and on the Internet. Further information can be obtained by contacting a brokerage firm or the fund itself.
Mutual funds invest shareholder money, into stocks, bonds, options or a combination. Contrary to Exchange Traded Funds, mutual funds can diversify their investments in different companies or countries. Exchange Traded Funds invest in a single industry. Both provide the same dividends, capital gains, and reinvestment option. Either one is available, as Closed End or Open End funds, which trades at or near their net asset value. Also, same income tax liability is applicable. Since a mutual fund is diversified, the downside risk is limited compared to an Exchange Traded Fund, where the downside can be worse, for an industry or sector that performs poorly.