ETF is not Actually a Texting Abbreviation
What is an ETF?
An ETF is a form of a mutual fund traded on a stock exchange. These mutual funds trade like stocks. And typically track a certain index.
What does ETF stand for?
ETF stands for: “Exchange Traded Fund”.
What does an ETF do?
It is designed to add simplicity to life. That’s a lie. It was probably designed to make money—but it also makes things simpler.
It’s just one stock (what is a stock?) that you can buy that replicates an entire index. This saves you from buying 500 different stocks or bonds or commodities.
How is an ETF different than a mutual fund?
In a mutual fund, you buy into a pool of securities. In this pool, a manager makes selections as to what securities to buy and sell. You pay the manager to make these decisions (this fee is typically called an expense ratio).
ETF’s are designed to simply replicate an index- not beat it. In an ETF, you look to eliminate most all deviation from the index- whether positive or negative. This is great for investors who just want exposure to an entire market- without great potential for outperformance or underperformance.
What are the benefits ETFs?
Diversification: ETF’s are diverse in that they own an entire index. And they can own any index– from bond markets to commodity markets. They can go long and short.
Flexibility: Because ETF’s trade like a stock and not a mutual fund – there is more flexibility. Why is a stock more “flexible” than a fund? The two main reason are 1) You can buy it at any point during the day- not just at the closing price (which is typically what you do with an index fund) 2) You can sell an ETF short – i.e. bet the price will go down not up.
Fees: ETFs tend to have low costs. This can be cheaper and more efficient than buying the underlying stocks. They also tend to be less expensive than mutual funds.
What are some popular ETFs?
You can buy an ETF that represents:
US Broad Market Index: a broad basket of US Stocks (i.e. S&P 500 Index, ticker: SPY For more reading: Spiders: the one’s without 8 legs)
US Specific-A certain piece of the market: a specific basket of US stocks (i.e. Internet, ticker: IYV or US Home Construction, ticker: ITB)
International Stocks: a basket of international stocks (i.e. Brazil Index, ticker: EWZ or Singapore Index, ticker: EWS)
Bond Markets: a basket of bonds (i.e. US Treasuries, ticker: SHY or Municipal Bonds, ticker: SHM)
Commodity Markets: a basket of commodities (i.e. Gold, ticker: GLD or the Grains Inder, ticker: JJG)
P.S.
Financial people have a good sense of humor. The ticker on the ETF for Global Solar Energy is TAN. The ticker on the ETF for Global Wind Energy is FAN. That’s pretty funny, right?
Related Articles: The Wall Street Journal: How to Choose an Exchange Traded Fund (ETF).
