What Are ETF Stocks?
Exchange Traded Funds (ETF) are a relatively new and innovative financial product that allow people to trade a broad-basket fund like a stock, with the capability to buy and sell shares within seconds. Already a major player in the global capital markets, ETFs look like they're only going to expand in size and scope in the years to come.
Other People Are Reading
-
History
-
ETFs came into being in the early 1990s, and soon surged in popularity by the end of the century. Two of the most heavily traded ETFs are the Powershares Nasdaq 100 Trust (QQQQ) and SPDR S&P 500 Depository Trust (SPY). They have been joined, in recent years, by a host of ETFs focused on specific market sectors or industries, such as the Merrill Lynch Semiconductor Holders Index (SMH).
Significance
-
Exchange Traded Funds have changed the way individuals and institutions trade the stock market. Before ETFs, somebody who wanted to buy a whole index had to either purchase every component stock in the index or buy a mutual-fund like index fund, which could only be traded once a day. With ETFs, investors have the ability to purchase an entire index, and can turn around and sell it in seconds if they desire.
-
Types
-
There are now hundreds of different ETFs that track all things from stock market indices to specific equity sectors, to commodities. Classic ETFs like the QQQQ and SPY ETF are un-leveraged, while a variety of newer ETFs sport 2x and even 3x leverage, meaning for every 1% of price difference in the underlying index, the ETF that tracks it will move 2% or 3%.
Features
-
The primary feature of ETFs is their accurate representation of an underlying index and their liquidity. Most ETFs are able to track an index of securities precisely, and since they offer shares to investors, in the manner of a common stock, someone can purchase a completely accurate representation of an index without expending the time or resources to purchase every component security. And with millions of shares traded on a daily basis, ETFs have superb liquidity, ensuring investors almost always can buy or sell at their preferred price.
Size
-
ETFs have become a huge player in the contemporary capital markets, accounting for hundreds of billions of dollars in volume each trading day. Some financial pundits have even blamed the rise of commodity focused ETFs for distorting agricultural and energy prices, as ETF managers often have to buy the actual commodity to ensure their fund properly tracks price movements.
Theories/Speculation
-
Some traders like to trade different ETFs against one another under the theory that financial indexes move in relation, and if one moves too far away from the other, this situation will likely correct itself, creating an arbitrage opportunity. Also called pairs trading, this method of speculation has proven particularly effective on major market ETFs like the QQQQ and SPY.
-
