Exchange traded funds
Also known as ETFs
ETF. A fund that tracks an index, but can be traded like a
stock. ETFs always bundle together the securities that are in an
index; they never track actively managed mutual fund portfolios
(because most actively managed funds only disclose their
holdings a few times a year, so the ETF would not know when to
adjust its holdings most of the time).
Investors can do just
about anything with an ETF that they can do with a normal stock,
such as short selling. Because ETFs are traded on stock
exchanges, they can be bought and sold at any time during the
day (unlike most mutual funds). Their price will fluctuate from
moment to moment, just like any other stock's price, and an
investor will need a broker in order to purchase them, which
means that he/she will have to pay a commission.
On the plus
side, ETFs are more tax-efficient than normal mutual funds, and
since they track indexes they have very low operating and
transaction costs associated with them. There are no sales loads
or investment minimums required to purchase an ETF. The first
ETF created was the Standard and Poor's Deposit Receipt (SPDR,
pronounced "Spider") in 1993. SPDRs gave investors an easy way
to track the S&P 500 without buying an index fund, and they soon
become quite popular.
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