Exchange-traded funds, or ETF’s, have taken the investment world by storm over the last few years. The first ETF, commonly known as the Spider (SPDR), was formed in 1993. This particular ETF tracks the S&P 500, and it is still one of the most widely held ETF’s. The ETF has basically emerged as an alternative to the mutual fund. There are many similarities between an ETF and an index fund, but there are also some key differences. Let’s take a closer look at exactly what an ETF is and why it has become so popular with investors.
An ETF is a security that tracks a particular group of assets. Some ETF’s track a stock index, but some also track areas such as commodities or bonds. While the majority of ETF’s are index related, the SEC did authorize the creation of actively managed ETF’s in 2008, and some investors are starting to go in that direction. For most investors, the single biggest perk to an ETF is the ability to buy or sell it at anytime throughout the day with a stock broker. This is in stark contrast to a mutual fund, which simply has its Net Asset Value calculated at the close of trading each day.
If there is one word that accurately describes an ETF it is flexibility. If you are an investor and are considering purchasing an ETF, you should realize that an ETF can be used in many different ways. Some like to use an ETF as a long-term investment, which is very practical. The upside to this is you are getting the benefits of a mutual fund without the high expense ratios, and with the ability to liquidate your position at any time. Other investors like to use an ETF to actively trade, which can be very profitable as well if you know what you are doing. The flexibility of the ETF allows an investor to sell short, use limit orders, and most ETF’s now offer the capability to buy and sell options. Clearly, the ways to utilize an ETF are unlimited, which gives the investor all the control!
How would you go about trading an ETF? The popularity of the ETF has grown to where virtually every online broker offers the ability to buy and sell an ETF. This means there are plenty of great places to get involved in the world of ETF’s. Stockbrokers.com has recently completed the Annual 2011 Online Broker Review, which gives you details about every online broker. If you are looking to save some money on commissions, as you always should be, some of the top online brokers are now offering commission-free ETF’s. The process of buying or selling an ETF is essentially the same as investing in an individual stock. It is wise to use limit orders and protect yourself from potential market volatility when making your transaction. With an ETF, the only sales charge you’ll be paying up front is the transaction fee. (Try our trade cost calculator to find your potential savings)
The ETF has turned into one of the best ways for investors to diversify their portfolio and minimize costs at the same time. The demand for ETF’s is on the rise, and because of the benefits associated with them, that is likely to continue in the future. If you aren’t already utilizing the perks of the ETF in your own investment portfolio, you might want to consider taking that step! Read our online broker reviews to find out more information on what platforms would suit your investing needs.