Exchange Traded Fund – ETF what is it, how it works, who likes it

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.

ETFs experience price changes throughout the day as they are bought and sold.

It trades on public exchanges and can be bought and sold during market hours like stocks.

Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.

You can pretty much find an ETF for just about any kind of sector of the market

Popular ETFs example

GLD SPDR Gold Trust
VWO Vanguard MSCI Emerging Markets
EEM iShares MSCI Emerging Markets Index
QQQ PowerShares QQQ
IVV iShares S&P 500
TIP iShares Barclays TIPS Bond Fund
VTI Vanguard Total Stock Market VIPERs
LQD iShares iBoxx $ Investment Grade Corporate Bond

Spider (SPDR), which tracks the S&P 500 index and trades under the symbol SPY
QQQQ, this ETF represents the Nasdaq-100 Index, which consists of the 100 largest and most actively traded non-financial stocks on the Nasdaq, QQQQ offers broad exposure to the tech sector.

Investor get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share.

Types of ETFs

  1. Index ETFs – Tracks performance of index by holding its portfolio sample of the securities in the index
  2. Commodity ETFs or often referred as ETCs – Tracking non-security indices, example Gold ETFs
  3. Bond ETFs – Exchange-traded funds that invest in bonds are known as bond ETFs
  4. Currency ETFs – Tracking all major currencies
  5. Active Managed ETFs – It is fully transparent, publishing their current securities portfolios on their web sites daily.
  6. Leveraged ETFs – Leveraged index ETFs are often marketed as bull or bear funds

ETFs Trading

ETFs trade on market, investors can carry out same types of trades they do with stock.

Meaning, investors can sell short, use a limit order, use a stop-loss order, buy on margin, and invest as much or as little money as they wish (there is no minimum investment requirement).

Major criticism so far

ETFs represent short-term speculation, that their trading expenses decrease returns to investors, and that most ETFs provide insufficient diversification.

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