ETF Exchange Traded Funds

Investor Economic and Financial Education

ETF Exchange Traded Funds




Exchange Traded Funds, or ETFs, are investment vehicles that are traded on stock exchanges, much like stocks. An Exchange Traded Fund holds assets such as stocks or bonds, and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. By owning ETFs, investors get diversification of an index fund, as well as often the ability to sell short, buy on margin, and purchase as little as one share. One of the most widely known Exchange Traded Funds is called the Spider, or SPDR. As of 2011, there were approximately 1,700 Exchange Traded Funds on U.S. exchanges.


Exchange Traded Funds offer public investors an undivided interest in a pool of securities and other assets, and thus are similar in many ways to traditional mutual funds. Although most ETFs are index funds that hold securities and attempt to replicate the performance of a stock market index, there are several other types of Exchange Traded Funds. One type of ETF is the Commodity ETF or Exchange Traded Commodities. Commodity ETFs invest in commodities, such as precious metals and futures. Among the first of this type of ETF was the gold exchange traded funds, which have been offered in a number of countries.  Another type, Bond Exchange Traded Funds, invest in U.S. Government bonds.


Many ETFs are country or region-specific thereby allowing investors ability to invest in various markets in a relatively simple manner. This can be effective for certain types of investors and overall asset allocation plans.


Because Exchange Traded Funds trade on an exchange, each transaction is generally subject to a brokerage commission. ETFs do, however, typically have a lower expense ratio than comparable mutual funds. This is because not only do Exchange Traded Funds often have lower shareholder related expenses, but also because they do not have to invest in cash contributions or fund cash redemptions, and therefore they do not have to maintain a cash reserve for redemptions, thus saving on brokerage expenses. In addition, in many cases ETFs are more tax efficient than conventional mutual funds in the same asset classes or categories.