About Index ETFs
ETF, which is an acronym for Exchange Traded Fund, is an innovative and fairly new investment vehicle. Index ETFs have many of the same features of index mutual funds. However, they also have many advantages over the traditional index mutual fund that make ETFs very attractive to investors. Index ETFs track a specific market index, such as the Dow Jones Industrial or the S&P 500. Newer ETFs target specific "sectors" of the stock market.
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History
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Index ETFs rose to popularity in the early 1990s. Originally, Institutional investors were the primary holders of ETFs. It wasn't until the boom of online investing occurred that individual investors began to take part in the ETF craze. Today, rather than being an esoteric trading strategy, Index ETFs are now a popular and mainstream investment vehicle.
Features
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Index ETFs have several advantages over the Index Mutual Funds to which they are often compared. Unlike mutual funds, Index ETFs can be bought and actively sold on the open market during all hours of the trading day. Mutual Funds can only be purchased or sold only at the end of the trading day. Also, unlike Index Mutual Funds, Index ETFs do not require a minimum investment in order to purchase shares.
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Benefits
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The benefits of Index ETFs to the investor are great. Because Index ETFs can be purchased in the same manner as traditional stocks, stock investment strategies such as shorting and limit orders can be implemented. This is not true of mutual funds. In addition, the lack of a required minimum investment for ETFs opens the door to a wider range of investors.
Warning
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Like any investment vehicle, it is recommended that you consult a qualified adviser before purchasing an Index ETF. Index ETFs are subject to the same market fluctuations as traditional stocks and can at times be volatile. Always be sure to seek expert advice in addition to doing your own thorough research.
Effects
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Index ETFs have had far reaching effects on the world of investing. This is especially true for the individual investor. The lack of a required minimum investment make Index ETFs available to any level of trader. It is possible to even buy a single share of an ETF. That is not possible with mutual funds, who can often have minimums in the tens of thousands of dollars. ETFs are a part of many portfolios in today's market and they have essentially leveled the playing field for index investing.
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