Wednesday, 26 April 2017

What is an Exchange Traded Fund or ETF?

An exchange traded fund, or ETF, is an investment fund managed by a professional money manager and traded on domestic or international stock exchanges.

Much like traditional stocks, an exchange traded fund - often referred to as an ETF - is an investment fund managed by a professional money manager and traded on domestic and international stock exchanges. An exchange traded fund is an investment fund that owns underlying assets, such as shares of stock, bonds, oil futures, hard assets, foreign currency, etc., and divides ownership of those assets into shares. The fund's shareholders do not directly own or have any direct claim to the investments in the fund; rather they indirectly own these assets.

An exchange traded fund seeks to track the performance of a particular index by holding in its portfolio, either the contents of the index or a representative sample of the securities in the index. The first and most popular exchange traded funds track stocks. ETFs can also be sector funds which invest in broad sectors, like finance, container shipping, and technology, or specific niche areas, like green power. Most exchange traded funds are index funds, but some ETFs do have active management.

Exchange traded funds have been available in the United States since 1993 and in Europe since 1999. By 2013, ETFs emerged as the most popular type of exchange-traded product.  Between 1993 and 2015, more than US$2 trillion was invested in exchange traded funds in the United States.

ETF shareholders are entitled to an investment income from the profits, such as earned interest, dividends or capital gains. Unlike many mutual funds, exchange traded funds do not reinvest an investor’s cash distributions in more units or shares. That said, investors can expect to pay commissions and management fees to invest in exchange traded funds. As well, there may be costs associated with setting up an ETF investment account.

Exchange traded funds typically have higher daily liquidity and lower costs, as well as tax efficiency and stock-like features, which make them a great investment alternative for individual investors. By owning an exchange-traded fund, investors get the diversification of an index fund, with the ability to sell short, buy on margin, and purchase as little as one share. Because ETFs can be economically acquired, held, and sold, some investors invest in exchange traded fund shares as part of their long-term investment strategy.

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