Exchange-traded funds (ETFs) are similar to index funds, but with one important distinction: they trade on stock exchanges. When you buy a share in an ETF, you are buying a share in a unit investment trust or another type of trust In order to create an ETF, the trust bundles together many different securities into one basket and then sells shares in the trust on a stock exchange. 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 anything with an ETF that they can do with a normal stock, such as short selling
Because ETFs are traded on stock exchanges, you can buy and sell them 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 you'll need a broker in order to purchase them, which means that you'll have to pay a commission. On the plus side, though, 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. Shortly thereafter, a number of other ETFs came onto the market, including "cubes" (which track the Nasdaq 100 under the symbol QQQ) and "diamonds" (which track the Dow under the symbol DIA). Today you can buy ETFs for dozens of different indexes.
Because ETFs are traded on stock exchanges, you can buy and sell them 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 you'll need a broker in order to purchase them, which means that you'll have to pay a commission. On the plus side, though, 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. Shortly thereafter, a number of other ETFs came onto the market, including "cubes" (which track the Nasdaq 100 under the symbol QQQ) and "diamonds" (which track the Dow under the symbol DIA). Today you can buy ETFs for dozens of different indexes.
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