EXCHANGE TRADED FUNDS or ETF’S as they’re more commonly known are similar to mutual funds; in so much as you the stockholder possess a basket of shares, however, as the ETF has it’s own identity on the stock market, it experiences changes in price throughout a trading day as it’s bought and sold
In fact as the name implies an Exchange Traded Fund is a Fund that is Traded on an Exchange. So if for example, you imagine there’s an ETF that’s based on a bundle of Gold Mining shares, when you buy a single share of that ETF you’re money is involved in dozens or maybe even hundreds of different Gold Mining companies. Supposedly it’s a way of minimizing the risk of being caught out when an individual company starts to fail.
Originally introduced on the Toronto Stock Exchange in 1990, ETF’s made their way to the American Stock Exchange in the mid 1990’s and are now flourishing in virtually every Stock Exchange around the world. Apart from being tax efficient, they have a lower expense ratio than comparable mutual funds (conventionally mutuals charge 1% to 3% whereas ETF’s normally charge under 1%) and most importantly of all; you as the stockholder possess all the control of immediate stock market trading.
Now because the Stock Exchange is such a gigantic beast, over the last decade ETF’s have grown to cover virtually everything from Real Estate to Car Production, Energy to Coffee Growers. In fact if you’ve got an individual interest you almost guaranteed to be able to find an ETF for it.
Below is just a quick guide to some of best-known ETF’s and their ticker names:
SPY Tracks the Top 500 U.S. Stocks (Sometimes referred to as Spiders)
DIA Tracks the Dow Jones Index (Sometimes referred to as Diamonds)
VTI Tracks the Total U.S. Stock Market
MDY Tracks Mid Cap Stock Index
IWM Tracks Small Cap Stock Index
QQQQ Tracks the NASDAQ 100
GLD Tracks Gold Shares
Obviously ETF’s aren’t for everybody. One of the drawbacks is the commission rate your Stock Broker will charge for every transaction. $10 to $15 on say a $50,000 transaction may not seem a lot, but if your share capital is $100 then you’ve immediately lost 10 to 15% and that’s a tremendous loss to endure. Also because of their very nature ETF’s require a certain amount of hands on involvement’ and if you don’t want the stress of stock market fluctuations to rule your life then possibly a mutual fund might be more advisable.
Having said that though, if you’re looking for the thrills and spills of the stock market and you’re aware that share prices are just as likely to fall as they are to rise then maybe an ETF could be the kind of share you’ve been looking for.