Stock Market Guide to Investing in Exchange Traded Funds
Exchange traded funds, or ETFs for short, are investment funds that trade as shares on major stock exchanges. There are many different kinds of ETFs; some specializing in commodity sectors like oil or gold and others acting as tradable replicas of stock market indices like the NASDAQ or S&P 500. For many investors, large and small, it’s much easier to buy shares in an ETF modeled after the Dow Jones 100 than to purchase shares in all 100 component companies. This greatly simplifies things for, as an example, an investor who follows Scandinavian stock markets and would be attracted to the XACT VINX30, an ETF that tracks the 30 most actively traded stocks in the financial markets of Norway, Sweden, Denmark and Finland.
ETFs are similar to stocks in that they can be traded in much the same way, including short selling, buying on margin and in many cases allowing option puts and calls to be written against them. ETFs require no minimum investment and can be freely bought and sold without the threat of penalty. The most popular ETF in the United States today is also the first to be created: Standard & Poor’s 500 Depositary Receipts, known colloquially as “Spiders” after their trading abbreviation SPDR, or SPY on the American Stock Exchange. Other popular ETFs have similar amusing nicknames, for example Dow Jones Industrial Average ETFs called “Diamonds” and NASDAQ-100 index ETFs referred to as “qubes”.
Exchange traded funds are similar to Mutual Funds but don’t pass on the fees entailed in purchasing their component stocks. Because they are only index-linked instead of actively managed, ETFs provide investors with a low cost way to invest in a broad based group of stocks. They share with mutual funds the innate security of a diffused focus within a defined sector, however, and this makes them very attractive for very large or institutional investors like pension funds. ETFs are a relatively new investment vehicle, having first been created in 1990.
Today, there are more than 100 ETFs listed on the NYSE Amex (previously American Stock Exchange) alone, and their popularity has spread across the globe as a low cost, reduced risk investment.