exchange-traded fund ETF
These funds are listed and tradeable on stock exchanges, so they can be bought and sold during the trading day. They usually track an index, either holding the underlying stocks of the index or using derivatives to achieve the same returns as the index. [1]
Exchange traded funds (ETFs) are a portfolio or basket of securities, which provide the aforementioned diversification, yet this investment vehicle is unique in that it trades on an exchange just like the shares of a common company stock does. Hence, it provides fund investors with liquidity throughout the day, instead of only once a day, usually at the end of the day, as mutual funds and unit trusts do.
Another benefit of ETFs is that they usually have very low management fees, as compared to actively-managed mutual funds. Due to this low-fee structure, it makes for a good, long-term investment vehicle for all investors.
The drawdown is that since it can be traded like the shares of a company stock, the temptation is to trade the ETF more frequently than it is necessary. This could result in investors paying excessive brokerage commissions and/ or transaction costs on their ETF purchases and sales.
Finally, not all ETFs are liquid, so an investor has to be careful and understand both the liquidity and transparency of the ETF before making an investment decision.
Example
The most well-known providers of ETFs are Barclays Global Investors (now BlackRock), Vanguard, and State Street. ETFs have grown in popularity because of their low fees, tradability (that is liquid and traded on exchanges), tax efficiency and diversification benefits.
For example, the Financial Times - in the "BlackRock profit boosted by rising equities" article - reported that iShares, BlackRock’s exchange-traded fund business in 2010, recorded growth in every product area except for emerging market equities.
Also, the Financial Times - in the "Education is key to retail sector growth" article - reported that despite the surging exchange-trade fund business, which now span global equity, fixed income, commodity and foreign exchange products, ETFs are still a novel investment product for many investors, and "education remains one of the biggest challenges ETFs face." [2]
ETFs are a convenient way for investors to track an index's performance. These are also called index share or index tracker. [3]
View
ETF Q&A: The good the bad and the synthetic
Video