Exchange Traded Funds (ETFs) are similar to mutual funds in their makeup, but very different in terms of how they are bought and sold. Like mutual funds, an ETF can represent a basket of stocks as well as bonds, T-bills, and other financial instruments. Like mutual funds, an ETF can track a particular index like the Standard & Poors 500 or the DOW Industrials. Or an ETF can specialize in one industry like pharmaceuticals, commodities, energy, high tech, or utilities.
The big difference between mutual funds and ETFs is that mutual funds are purchased from the company that created the fund. There is sometimes a minimum investment to get into a mutual fund. There are ongoing fees for the fund. Some pay dividends but many do not. It is not as easy to get in and out of mutual funds.
ETFs, on the other hand trade exactly like stocks. You can buy and sell them through your Internet stock account or any stockbroker. The cost for buying and selling ETFs is the same as buying or selling an individual stock. The big advantage is that you don’t need a minimum investment to buy the Exchange Traded Fund. And you can buy and sell shares quickly.
By buying an index ETF, you can buy a whole basket of stocks with one purchase and the per-share price may be lower than the average cost of the stocks in the fund. You can purchase a wide variety of stocks or narrow down to a single industry or even a single product.
For example, there are now ETFs for gold and silver. You can buy into the gold ETF and actually buy less than an ounce of gold. The gold and silver ETFs roughly follow the daily spot price of gold. It is like buying physical gold and silver without having to store it. The gold ETF (GLD) sells one-tenth of an ounce of gold as one share. With gold currently at about $660/ounce, one share of GLD would cost you $66. With the silver ETF (SLV), on the other hand, one share represents 10 ounces of silver and would cost you over $130 per share.
Buying and selling ETFs is easy but it is still very important to do your homework and see which ETFs are right for you, whether highly diversified or more narrowly focused. Look for what is hot and what is not. Study how various ETFs are performing in the current market.