ETFs, or exchange-traded funds, are investment funds whose shares are bought and sold through the stock exchanges. The first ETF was launched in 1993 and by December, 2010, the Index Universe website listed almost 1,100 ETFs in its database. ETF investing allows investors to participate in a wide range of market sectors though a regular stock brokerage account.
ETFs are a type of open-end fund similar to mutual funds. With mutual funds, shares are bought and redeemed directly with a fund company. ETF shares are purchased and sold through the stock exchanges. Exchange-traded funds hold portfolios that mirror the securities tracked by a specific index or commodity price. ETF portfolios are not usually actively managed, they just track the specified index.
Types of ETFs
The first ETF was the SPDR S&P 500 fund, symbol SPY, which owns the same stocks in the same proportion as the S&P 500 stock index. There are ETFs that track all of the major stock indexes and a wide range of sector focused stock indexes. Other ETFs track bond indexes, international stock indexes and commodities such as gold, silver and oil. Inverse ETFs are designed to increase in value if the tracked index or commodity declines.
ETF Investing and Trading
Shares of an exchange-traded fund trade on the stock exchanges, allowing investors to buy and sell the shares through a regular brokerage account. The easy, low-cost trading of ETF shares makes them popular for short-term trading. Long-term investors can use ETFs to build a diversified portfolio covering stocks, bonds, international investing and commodities in a single brokerage account. Most ETFs also have options contracts trading against the share values. Options trading offers investors and traders another way to generate profits on changes in ETF values.
Largest Exchange Traded Funds
According to data from the ETFdb.com website, in December 2010, the three largest ETFs were the SPDR S&P 500 fund, the SPDR Gold Shares, symbol GLD and the iShares MSCI Emerging Markets Index fund, symbol EEM. These three funds cover U.S. stocks, the price of gold and the stock markets of the world's growing economies. The largest bond ETF was the iShares Barclays TIPS Bonds, symbol TIP, which holds inflation-protected U.S. government bonds.