Stocks: Dividend - What Are ETF's - How To Value - Home
 
What Are ETF's?
A commonly asked question that I receive is what are ETF's?

An ETF is an Exchange Traded Fund, which are quite popular today.

An exchange-traded fund (ETF) is an investment that represents a pool of securities and can be bought and sold on a stock exchange in the same manner that company stocks are. The first ETFs were designed to efficiently track important stock market indices such as S&P 500 or the NASDAQ 100, although as more and more ETFs are created, they have become progressively more diverse and more specialized. Today there are hundreds of ETFs, providing the average investor with simple, inexpensive and less risky access to areas such as stock futures, short selling, global stock exchanges, corporate bonds, currency trading and commodity trading.

Because there is a mechanism for issuing and redeeming shares, and because the holdings of ETFs are transparent, arbitrage is possible between the ETF price and the value of its underlying holdings. This means that an ETF will normally trade at a price very close to its net asset value (NAV).

In concept, an ETF is much like a mutual fund. The advantages of ETFs are that they can be bought and sold at any time, and that fees are much lower -- there is no front- or back-end load, and the majority of ETFs charge low management fees in the range of 0.25% and 0.75% per year. However, as with trading stocks, an investor must also consider costs due to brokerage fees and the bid-ask spread.