In the past couple of years, one of the best financial innovations to become popular has been the Exchange Traded Fund or ETF. The use in exchange traded funds has exploded due to the fact they are easy to trade and help various financial strategies. They are a very important tool for investors to know.
ABOUT
Exchange traded funds are pools of money set up to invest in a certain group of investments or sectors. They are different from mutual funds because they are traded like stocks on exchanges. This makes these funds easier for investors to buy and sell. Investors favor these funds because of those reasons.
USES
There are many different uses for ETFs. One is it allows the individual investor the ability to buy into whole parts of a market, instead of buying each stock individually. Many small investors aren’t good at picking individual stocks. Most can see which groups of stocks will increase, but they can’t get a feel for which companies in the group is the best.
Another use is to diversify investments. By buying ETFs and not single stocks or mutual funds, an investor could diversify across the whole economy for a cheaper price than it would cost to buy all the stocks. This allows the investor to buy into stocks throughout the whole US economy.
The third use is they give investors a chance to invest in assets they normally wouldn’t be able to invest in. One example would be the US energy fund (USO). It allows investors to buy and sell shares in the price of oil. Otherwise, the investor would have to buy oil futures, which would cost thousands of dollars extra then if the investor just bought the oil ETF.
EXAMPLES
The most popular ETF is the SPDR or Standard & Poor’s Depository Receipts. It trades on the AMEX and its stock ticker is SPY. It tracks the S&P 500 stock index. They are also known by their nickname: Spiders. It is the most popular ETF because the S&P 500 is the most popular stock index in the US.
Another popular ETF is the streetTRACKS Gold Shares ETF. It is known by the ticker symbol GLD. It is used to allow investors to track the price of gold. To track the price of gold, the fund manager buys gold assets and holds them as the price increases (or decreases.) There is also an ETF that tracks the price of silver with the ticker symbol SLV.