About Exchange Traded Funds

An ETF (Exchange Traded Fund) is an investment vehicle designed to have characteristics of the mutual funds and flexibility of trading as stocks. ETFs (Exchange Traded Funds) are traded on stock exchanges in the same way the stocks are traded. They could be sold and bought during the trading hours, they could be sold short and they could be traded on margin. Majority of the Exchange Traded Funds are index ETFs (or commonly known as Stocks ETFs). Examples of such funds could be QQQQ stock that tracks the Nasdaq 100 index, XLF stock that tracks the S&P 500 Financials index, SPY stock that tracks the S&P 500 index, IWM stock that tracks the Russell 2000 index, DIA stock that tracks Dow Jones Industrials index, etc. Most of the mentioned above ETFs (SPY, QQQQ and XLF) are the most active (most traded) securities on the U.S. stock market.

The ETFs have been introduced in the 90th and have become very popular among investors in very short period of time. As I already mentioned above Exchange Traded Funds combine in themselves features of a mutual fund or unit investment trust with the tradability feature of a stock. ETFs have become available on the US stock market since 1993 and they have been introduced in Europe in 1999. In the beginning exchange traded funds have been developed to track the indexes, however in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively-managed ETFs

There are three main reasons why exchange traded funds have attracted institutional and retail investors: a) They have relatively lower than mutual funds cost, yet they allow to participate in the investment into basket of stocks; b) Tax efficiency because as a rule ETFs have lower capital gain; c) Stock-like features which allow to sell ETFs short and trade them during the market open hours unlike the mutual funds that could be bought or sold only once a day at the market close. Ability to trade ETFs on margin is another stock-like feature which attracts many speculators.

In opposite to the stock trading ETFs trading allows investors to diversify the portfolio in economical way. By making a purchase of single ETF share that tracks an index, an investor diversifies his/her portfolio among all stocks from this index basket.

Below you may see several main types of Exchange Traded Funds available on the current stock market:
1. Index ETFs.
2. Bond ETFs.
3. Commodities ETFs.
4. Currencies ETFs.
5. Leveraged ETFs.
6. Hedge Funds ETFs and others.

By: Viktor Ka

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