ETF investing

ETFs are not traditional mutual funds. However the fact still remains that they are compared with mutual funds to calculate returns on investment. Though ETFs are built like mutual funds but they are actually traded like stocks. ETF investing is attractive for individuals, institutional investors and also for investment advisors, because they provide liquid and cost-efficient exposure to a broad range of asset classes. ETF investments contain a pool of securities from a specific index like the Dow Jones industrial average or the S&P 500.

Unlike regular open-end mutual funds, which are valued based on closing prices, ETF investing allows an investor to buy and sell throughout the trading day. They can also be sold short and bought on margin (that is with the brokers money). What this means is that, anything and everything that is carried out with stocks, can also be done in ETF investing.

Although ETFs are more flexible than mutual funds and can be traded on an exchange throughout the day, but unlike regular mutual funds, ETFs do not necessarily trade at the net asset values (NAV) of their underlying holdings. Instead, the market price of an ETF is determined by forces of supply and demand for the ETF shares, which again is driven by the underlying values of their portfolios. In reality, ETFs can trade at prices above or below the value of their underlying portfolios.

The first ETF investing fund was the Standard & Poor's Depository Receipts, which is also popularly referred to as SPDR. It was launched in 1996. Since then, the many advantages of this type of investing have lead to an increase in their popularity. By the end of April 2001, the ETF industry had grown to nearly $76 billion in assets spread across 114 funds.

There are many advantages of ETF investing. This structure is considered more tax efficient than mutual funds due to the limited exposure to capital gains distributions that can occur when fund managers are forced to sell securities to meet redemptions.