Exchange Traded Funds

Exchange traded funds are a form of mutual funds and are termed as open ended mutual funds. These funds are based on assets and can be freely traded during the day at exchanges where their trading is done. An exchange traded fund is fairly large and has a basket or a creation unit. The minimum number of shares in an exchange traded fund can vary from 10,000 units to 600,000 units. The baskets are freely traded depending on their index and they may also be exchanged for other baskets. The assets that they are linked comprise a mix of shares. As no one will put all there eggs in a single basket and that is why ETF assets are a mix. If one of the assets is not doing well it would be balanced out by an asset that is doing well. Should an ETF be comprised of the same asset then the rise and fall of that base asset would have a direct impact on the ETF.

The first ETF was started in the Toronto Stock exchange in 1990 and today there are over a hundred ETF in the United States and there are a number of ETF worldwide. It is important for the holder of an ETF to know what the ETF is based on so that they can participate more actively in its trading. As ETF trading is based on the way the underlying asset is behaving the trader must know what assets make up the ETF. Whereas American mutual funds are only available to US citizens there is no such limitations on the ownership of ETF and anyone can trade an ETF in America without being an American citizen. ETF have there advantages over other funds like open ended mutual funds and the cost of managing an ETF is lower then that of managing a mutual fund. More and more investors are turning towards ETF as they can be easily traded as a single unit and have lower operating costs which also has certain tax benefits for the ETF investors. Most ETF trading indexes are independent indexes and have been worked out independently. The ETF indexes do follow some of the stock exchange indexes but their working methodology differs. As ETF are traded on a stock exchange there is a broker fee involved and extensive trading of an ETF can wipe out any profits that are made on its trading. Some brokers offer low fee or no fee for trading ETF which now makes them a viable option.

There is a lot of discussion regarding ETF and ETF trading that can be quite confusing as not everyone can understand the intricacies of the financial trading sector and its terminology. So to state simply an ETF is like having a basket which is made up of a variety of shares bonds and other financial instruments and the entire basket is traded. One can invest in different ETF and do not have to be limited to a single ETF. Wisdom tree ETF, Vanguard ETF, uranium ETF and State Street and ETF are some of the more popular ETF that are well known in USA.

One can ask to look at ETF portfolios of the different ETF that one can invest in and the information regarding most ETF is readily available on the internet. One can also look at the performance of an ETF in the ETF trader newsletter or by looking at the ETF trading index and see how an ETF is performing.

The advantage of an ETF is that they are traded as a whole and not as individual components and that is a plus point that they have over mutual funds where the fund manager are buying blocks of bonds and stocks and trading them and not as a complete package.