What is an ETF

What is an ETF? Exchange traded funds (ETF) are essentially mutual funds that trade just like a regular stock. They can be purchased through your broker just like you would purchase shares of any company. Most ETF’s are designed to track indexes but recently some ETF’s where created that almost rival actively managed mutual funds. A huge variety of ETF’s have been created and just about any index available can be purchased through an ETF. Generally ETF’s are very cheap when compared to rival mutual funds.

Unlike mutual funds an ETF is priced continuously throughout the day. As they trade just like a stock they have a bid and an ask price. In order to purchase an ETF all you have to do is enter the ticker, the number of shares, and price you are willing to pay. When purchasing an ETF you should use a limit order as you would when purchasing stocks. Some ETF’s can be thinly traded and a limit order will save you from an extreme price.

ETF’s can be extremely attractive to investors under certain circumstances. They usually have a very competitive expense ratio and most often no other expenses. However, as they trade as a stock you will pay a brokerage fee when purchasing and selling. If you are investing small amounts often it would be advisable to stick with a mutual fund. On the other hand if you have a large sum to invest a portfolio made of ETF’s will probably save you money in the long run.

Often, an investor will want to track an obscure index but not be able to find a reasonably priced mutual fund. Such a huge variety of ETF’s exists that you can generally find an ETF for just about any index you wish to invest in. There are ETF’s that track domestic stock, domestic bonds, international stock, and international bonds. If you cant find an ETF which tracks an index you want all you have to do is wait as it probably will be released shortly.

Everyday more and more money is put into ETF’s. Many investors think of ETF’s as the future of investing as they are inexpensive, flexible, and easy to invest in. When picking the indexes for your asset allocation it would be wise to take a second look at ETF’s as they may just beat your mutual fund. Hopefully you now have an idea of what an ETF is and can answer the question, “What is an ETF?”