Exchange-Traded Fund

Exchange-traded funds are more or less like stocks. These are investment funds that are traded on stock exchanges. Stocks, commodities, or bonds and trades are held as assets which are approximately of the same net value of the underlying assets. Exchange-traded funds are however a type of exchange-traded product most popular among investors. These funds are basically index funds and the shares associated with them are listed on a stock exchange. These funds are traded just like equity securities at market prices. The exchange traded funds (ETFs) give investors the freedom to buy or sell shares of a fund of a specific group of securities. They have the flexibility and liquidity of stock trading which in turn boosts the traditional index-fund investing. They can be regarded as the most practical vehicle. The reason mainly being, they help to make the decision of the investor easier and understanding what is more important of their asset classes.

The Spider (SPDR) is a widely known ETF. It tracks the S&P 500 index and the symbol is SPY under which it does all the trading.

There Are However Seven Major Types Of Etfs That Functions Through Different Strategies:

  • Index ETFs
  • Commodity ETFs or ETCs
  • Bond ETFs
  • Currency ETFs or ETCs
  • Actively managed ETFs
  • Exchange-traded grantor trusts
  • Leveraged ETFs

Most of The Stock Indexes Have ETFs Associated Wih Them. Example:

  • Dow Jones Industrial Average
  • Standard & Poor's 500 Index
  • Nasdaq Composite

The Most Important Benefits Of An ETF Are:

  • You have the leverage of diversification of an index fund and at the same time there is the freedom to buy on margin – yes, as marginal as one share only!
  • The expense ratio is also relatively lower than the average mutual funds. The reason why they are so popular is, they are economical to buy and so, especially attractive if one is planning for a long run. While the mutual fund fees are as high as 1.4%, for ETFs the annual fees can be as low as .09% of assets.
  • Then there are the tax effects. ETFs are good options for there are scopes for them to be margined. There are also a good number of options for defensive investing strategies.
  • ETFs are basically index funds, but unlike the index funds, the investors do not need to hold on to a buy-and-hold approach.
  • They are also a type of popular hedge fund. They come with a security like the stock certificates themselves.

ETFs trades on stock exchanges and functions and like a mutual fund. It is like, the ETFs have the best of both the worlds. The main strategies of trading through ETFs are:

Core Holding

The investor can have some core portfolio holdings and additional securities, mutual funds or other ETFs.

Asset Allocation

The asset allocation strategy is relatively easy with ETFs. There are options of buying an ETF that has been already diversified across different asset classes.

Diversification

ETFs allow the investors to diversify along U.S. equity, foreign equity and fixed income and even investments having low correlation to the major asset classes like real estate and cap stocks.

Cash Management

ETFs help the investors in equitizing cash until a long term investment decision is made. 

Tax-Loss Harvesting

This is because ETFs are very similar to funds or stocks.

Completion Strategies  

An investor can safely get exposure to specific sectors without having mastery in the areas. This way, they can fill the holes that are there in their portfolio.

Portfolio Transitions 

While the portfolio assets are moving between different advisors, managers or funds, ETFs can keep the assets invested. Otherwise, they are likely to sit dormant in this transition period.