ETF Investment - What is it and how does it work?

What is an exchange-traded funds (ETFs)?

An investment ETF is an exchange-traded fund, a type of investment vehicle traded on exchanges. Stocks ETF are treated like individual stocks, with prices on the go all day.

An ETF holds assets such as stocks typically (typically a mixture of investments in mutual funds and investment funds) or bonds. Many ETFs, in fact, draw a general index, such as 500 or MSCI EAFE SandP. Total value of an ETF is usually around the same price as the net value of its underlying assets, if it is tracking an index, its value generally moves in line with changes in this index. Only "authorized participants" (investors usually large) are actually allowed to deal directly with the ETF in terms of the purchase or sale of shares or fund manager. These operations usually involve the purchase or sale of units "creation" (ie groups of tens of thousands of ETF shares. Individual investors then through these "authorized participants" to buy shares of the ETF and develop their strategies trading of ETFs.

How long ETFs are around?

ETFs are a relatively recent, having only been available in the U.S. since 1993. In 1992, the American Stock Exchange (AMEX) have made use of the SEC "SuperTrust Order" to request the use of the first ETF authorized. The SEC has approved the petition, and granted the Order of the SPDR in October 1992, allowing then the AMEX to list SandP Depositary Receipts, Trust Series 1 (aka "Spider") (which was the benchmark Standard & Poor's '500 ), the after year. ETFs came to Europe a few years later, in 1999. (In the U.S., as well as "spiders" new ETFs later reference as the Dow Jones Industrial Average (DIAMONDS Trust Series 1 ("Diamonds") and NASDAQ (NASDAQ 100 Index Tracking Stock ("Cubes"), followed in 1998 and 1999 ..)

As such, the ETF has been so far mostly what might be called "index funds", which tracks the integer indices (as above). While, during their short history to date, ETFs have traditionally been the domain of large investors and / or offshore, with investors reluctant to trade in them, this trend is changing. Now private investors represent approximately 40 percent of contracts ETF in the U.S., a figure that looks set to increase. One of the reasons that private investors have become more interested in ETFs is that they provide access to funds that track the activities and sectors that were previously available only to large investors.

Types of available ETF investments

From their start-up, a number of different types of ETF have developed on the market. These include mutual funds (index products include iShares, Select Sector SPDRs, PowerShares, Vanguard, and WisdomTree), Unit Investment Trust (ISSF) (products include BLDRs, Diamonds, SPDRs and PowerShares QQQ Trust), grantor trusts (products include Legal Actions Currency, Gold Shares and iShares Silver Trust Streettracks, and Merrill Lynch HOLDRS), exchange-traded (ETN) (ETN iPath ETN products include, the elements) and Partnerships (U.S. products include Oil). (Source: EFTGuide.com). In 2003, the assets held by the ETF in the U.S. alone exceeds U.S. $ 155 billion.

To understand whether the investment is suitable for you and ETFs in choosing which particular vehicle to be included in the portfolio, it is imperative that you understand, among other things, its advantages and disadvantages....