What are Exchange Traded Funds (ETF)?

Published by Thomas Herold in Investments

'Exchange Traded Funds (ETF)' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

These ETF’s prove to be stock market exchange traded investment funds that work very much like stocks. Exchange Traded Funds contain instruments like commodities, stocks, and bonds. They trade for around the identical net asset value as the assets that they contain throughout the course of a day. The majority of ETF’s actually follow the value of an index like the Dow Jones Industrial or the S&P 500. Since their creation in 1993, ETF’s have evolved into the most beloved kind of exchange traded instruments.

The first Exchange Traded Fund particular to countries proved to be a joint venture of MSCI, Funds Distributor, and BGI. This first product finally turned into the iShares name that is accepted and recognized all over earth today. In the first fifteen years, such ETF’s were index funds that simply followed indexes. The United States Securities and Exchange Commission began allowing firms to establish actively managed ETF’s back in 2008.

Exchange Traded Funds provide a number of terrific advantages for smaller investors. Among these are elements like simple and effective diversification, index funds tax practicality, and expense ratios that remain very low. While doing all of this, they also offer the appeal of familiarity for you who trade stocks. This includes such comfortable and helpful options as limit orders, options, and short selling the ETF’s. Since it is so inexpensive to purchase, hold, and sell these ETF’s, many investors in ETF shares choose to keep them over a longer time frame for purposes of diversification and asset allocation. Still other investors trade in and out of these instruments regularly in order to participate in their strategies for market timing investing.

Exchange Traded Funds boast of many advantages. On the one hand, they provide great flexibility in buying and selling. It is easy for you to sell and buy them at the actual market price any time during a trading day, in contrast to mutual funds that you can only acquire at a trading day’s conclusion. Since they are companies that trade like stocks, you can buy them in margin accounts and sell them short, meaning that they can be used for hedging purposes too. ETF’s also allow limit orders and stop loss orders, which are helpful for assuring entry prices and protecting profits or safeguarding from losses.

ETF’s also provide lower costs for traders. This results from the majority of ETF’s not being actively managed. Also, ETF’s do not spend large amounts of money on distribution, marketing, and accounting costs. The majority of them do not have the fees associated with most mutual funds either.

ETF’s are among the greatest vehicles for diversifying portfolios quickly and easily. As an example, with only one set of shares, you can “own” the entire S&P 500 index. ETF’s will give you exposure to country specific indexes, international markets, commodities, and even bond indexes.

ETF’s have two other advantages. They are both transparent and tax efficient. Transparent in this regard means that they are clear in their portfolio holdings and are priced all day long. They are tax efficient as they do not create many capital gains, since they are not in the business of buying and selling their underlying indexes. They also are not required to sell their holding in order to meet redemptions of investors.

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The term 'Exchange Traded Funds (ETF)' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.