How Does an ETF Work?
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Introduction
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EFTs or Exchange Traded Funds are a new form of investment that offers many possibilities. Basically, EFTs act like a mutual funds but trade like a stock. There is a variety of EFTs available from index funds to biotechnology funds. EFTs are cheaper to invest in because of the low expense ratios compared to mutual funds. There is also a lot more flexibility in trading EFTs, which mutual funds do not have. Both EFTs and mutual funds are professional managed and have a diverse portfolio that reduces risk and volatility when trading. These unique investment vehicles are a good choice for long-term investing.
Types of EFTs
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EFTs are similar to mutual funds because they have a large, diversified portfolio of hundreds, or in some cases thousands, of companies. There funds usually center around a theme. Some EFTs follow indices like the Dow Jones Industrial Average or the S & P (Standard and Poor's) 500. Other EFTs focus on commodities like gold, oil, or pork bellies There are also EFTs that buy and sell corporate or municipal bonds. Still other EFTs focus on companies in certain industries, such as biotechnology, financial services or aerospace, or deal exclusively with international companies. EFTs are as diverse as mutual funds in terms of portfolios.
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How Does an EFT Work
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EFTs differ from mutual funds in a few important ways. While mutual funds are traded at one price called the net asset value (NAV) at the close of the trading day, EFTs trade throughout the day at various prices because they are listed as securities on a stock exchange. Most EFTs are on the American Stock Exchange. EFTs are similar to stocks because they trade on exchanges and offer the same advantages. Like stocks, EFTs have a ticker symbol for the exchanges they trade on. Investors can buy one share of an EFT, buy on margin, sell short or option the EFT. None of these strategies are possible with mutual funds.
How to Buy EFTs
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Because EFTs trade on exchanges, a broker is needed to buy and sell shares of an EFT. There are also commissions for every trading order. Buying EFTs can also be cheaper than buying mutual funds because an investor can buy one share of an EFT while most mutual funds have a minimum initial deposit of $1,000. When choosing an EFT research the fund. Learn about the portfolio of a EFT and check its price history to fund an investment that has a good chance of being profitable in the long-term.
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Comments
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Noticed a typo throughout this page - EFT?
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It is an ETF not an EFT dumb fuck! How does your editor let you write an entire article on exchange-traded funds and neither of you notice the order of the letters?
