01) Exchange-Traded Funds

by · June 15, 2010

Exchange-Traded Funds (ETF) are baskets of securities that trade intraday like individual stocks on an exchange, and are typically designed to track an underlying index. ETFs can be used to help diversify your portfolio.

Investors, from very well respected institutional money managers to investors who are just beginning, consider ETFs to be of great importance to their portfolios. While the use of ETFs vary among investors, there is one common goal to build and execute an effective investment strategy. Just like any other investment medium, thorough understanding of ETFs is needed in order to actually benefit from it.

Most ETFs are clear-cut and easy to understand. An ETF looks similar to a mutual fund and trades like any listed stock on a stock exchange. The ETF is created to closely track a specific market index, thus considered to be passively managed. On the other hand, mutual funds are considered to be actively managed.

From an investor’s standpoint, if an investment is made in an index mutual fund and an ETF that tracks the same index, it will result to equivalent investments. Even though major indexes are mostly covered by index mutual funds, a wider array of indexes are covered by ETFs, thus more investing options are provided to an ETF investor.