What Is An ETF And What Does It Have To Do With An Index?

by : infocus

An Exchange Traded Fund, more commonly known as ETF, is a collective investment much like a Mutual Fund. It is a commonly used tactic to get people to invest in a wider range of investments than they would have chosen on their own. These schemes are also known as mutual funds or simply managed funds. A large portion of these funds are traded on the worlds stock exchange.

1. Short Term Investing Strategy

First of all, the exchange is always on and thus trades are able to happen continuously. More trades happen per day so there is a greater chance that you will find a buyer for your commodity. These qualities give ETF's some advantages over Mutual Funds in the US. ETF's allow for a diversified portfolio at a low cost. They can be used in both long term buy and hold and for selling with a short-term strategy.

2. ETF Popularity

The popularity of ETF's have continued to rise because they offer unparalleled benefits. They offer the diversification benefits of a Mutual Fund with the features of stock. As more and more ETF's become available, it is likely their popularity will increase even more. ETF's typically have lower expense ratio's and lower turn-over rates.

3. What's The Difference Between ETF Also, Mutual Funds Then?

ETF's typically have lower expanse costs than mutual funds. Being passively managed, you end up paying about three percent less per transaction. Over time this can add up to quite a lot of money. ETF's can also be more tax efficient. In the US when ever a Mutual Fund realizes a capital gain, it must distribute it to the shareholders at the end of the quarter. Investors can carry out the same sort of trades that they can with a stock.

4. Getting Started

If you are looking to get started in having your own ETF you can contact your brokerage account or local financial investment firm. Compared with other types of investments they are simple to acquire and much easier to use.

5. Be careful about weighting

Even though ETFs normally track a market index or a market sector, it is important to understand that most sector are dominated by a small group of large companies. For example if you were to buy an ETF of the TSX (Toronto Stock Exchange), you should be aware that you are essential investing in a small group of energy companies and Canadian banks. A way around the problems of ETF weighting is to buy your EFT's through a service like Power Shares