Exchange-traded funds, or ETFs, are one of the fastest growing types of investments. The first ETF was launched in 1993; as of 2010, there are over 920 available and over 80 percent of the total have been started since 2004.

Description

Exchange-traded funds (ETFs) are investment companies like mutual funds, closed- end funds and unit investment trusts. An ETF is a pool of securities or other assets and investors own shares of the pool.

Function

ETFs are index funds that hold the same securities that are tracked by a specific index. For example the SPDR S&P 500 ETF, symbol SPY, owns the same stocks in the same proportion as are tracked by the S&P 500 stock index.

Features

ETFs, as their designation states, have their share traded on the major stock exchanges. Shares in an ETF are bought, sold and held in a brokerage account like any common stock. Exchange trading allows purchase on margin and options trading.

Effects

Exchange trading allows the values of ETF shares to change during the trading day to reflect the value of the tracked indexes. ETFs are often used for day trading of specific markets or sectors. They can also be used for long-term investing in broad or narrow market sectors.

Potential

ETFs are now available to invest in a broad range of asset classes. Besides tracking broad stock market indexes, some ETFs track narrow stock market sectors, international stocks, individual foreign stock markets, bonds, currencies, precious metals, and commodities. Some ETFs are even designed to go up in value when certain market sectors are going down.

Source:

ETF Guide: ETF Education Center

SEC: Exchange Traded Funds