What are Exchange Traded Funds

Exchange Traded Funds (ETFs) have been available in the U.S. since 1993. In their composition, they are most like mutual funds. Like mutual funds, many ETFs mimic certain indexes like the S&P 500 or the NASDAQ. They may also follow a certain industry, like pharmaceuticals, commodities, energy, or tech stocks.

Although their composition may be similar, the way mutual funds and ETFs are traded is quite different. Mutual funds generally have more fees. The fees vary depending on whether it is an index fund or a more actively traded fund.

It usually takes a minimum investment to get into a mutual fund. With an ETF, you can buy a single share if you wish. ETFs are traded like an ordinary stock. You can buy or sell at any time. Of course you will have to pay your normal brokerage fee.

Because it is easier to buy and sell the shares of ETFs, it is easier to be an active trader, just as you might be with regular stocks.

The number of ETFs have exploded since their beginning. You can find ETFs that track indexes, industries, or foreign stock exchanges, but you can also find ETFs that track a single commodity. There is at least one gold ETF (StreetTracks Gold, GLD) and at least one silver ETF (iShares Silver, SLV). These ETFs mimic the spot price of gold and silver.

ETFs can therefore be as broad or as narrow as you wish. Obviously the broader ETFs, like the indexes, carry less risk and promise slightly lower returns. The narrower ETFs, like a single commodity or small industry, are more volatile and risky with higher potential losses and gains.

If you haven’t looked into ETFs, you should check them out. They allow you to get quickly into a hot industry (like oil or energy) and quickly get out if things go south. Some ETFs can be left alone but some need to be watched as closely as any stock.

I have already made good profits on my GLD and SLV ETFs and then bought in again after both corrected recently. With food and energy prices rising, these are good commodities for ETF investing. Looking ahead, I would search out ETFs on alternative energy plays. It is clear that we are finally going to have to take alternate and renewable sources of energy seriously. Look for ETFs in this industry.

Like mutual funds, ETFs are an easy method for instant diversification, whether you invest in an index or a whole stock exchange. See what’s hot and what’s cooling down and put your foot in the ETF waters. It could be good for you.