ETF Funds

In recent years, the popularity of ETF funds has gone up. But what exactly is an ETF fund? An ETF is a group of stocks that reflects the composition of an index, like the S&P 500 or the NASDAQ 100. The trading value of ETF is based on the net asset value of the stocks, which it represents. It is something like a mutual fund that can be bought and sold at a price that changes throughout the day.

How to trade in ETFs?

US based ETFs trade on the American Stock Exchange (AMEX). You can buy shares in the same way you would buy a stock. Like individual stocks, ETFs have ticker symbols (like DIA or QQQ) and can be purchased through a broker. You can also sell shares in an ETF in the same way you normally sell shares of a stock.

Benefits of ETF Funds

There are actually quite a few benefits. The main benefit however has to be in flexibility. With an ETF, you have the flexibility of a stock and the diversification of an index fund. While most mutual funds are priced at their net asset value (NAV) at 4:00 p.m. daily, the price of the ETF changes in real time throughout the day. You are also able to buy ETFs on margin, that is with money borrowed from a broker and sell it short. As opposed to stocks, ETFs can be sold short on a downtick, in a down market.

Another advantage is in expense ratio. The expense ratios of most ETFs are extremely low. Since the underlying components of ETF remain constant, the fund is not forced to sell stocks when investors sell their shares. This is another important aspect. Often, when traditional mutual fund investors sell off, all investors in that fund suffer capital gains tax consequences. While ETF investors also suffer capital gains costs due to dividend payouts, they do not suffer these consequences from redemptions in the fund.