Exchange-Traded Funds

An exchange-traded fund (ETF) is a type of security that is similar to an index mutual fund, because it tracks an index, commodity or a grouping of assets. But unlike a mutual fund, it can be traded like a stock on an exchange, with prices changing as shares are bought and sold.

One of the best known ETFs is called the Spider (SPDR), which tracks the S&P 500 Index and trades under the symbol SPY.

Structure & Management

Depending on investor needs, ETFs are available in actively or passively managed structures.

Diversification

With an ETF, you get the diversification of a mutual fund, as well as the ability to sell short, buy on margin and purchase as little as one share.

Affordability

But unlike a mutual fund, it can be traded like a stock on an exchange, with prices changing as shares are bought and sold. As a general rule, ETFs can be relatively inexpensive, but there are costs involved, such as commissions to trade them, operating expenses while holding them, and changes in discounts and premiums of the fund’s market price compared to its net asset value (NAV).

Convenience and Accessibility

A passively managed exchange-traded fund is a type of security that is similar to an index mutual fund, because it tracks an index, commodity or a grouping of assets. An actively managed ETF has a portfolio of investments that is determined by the investment manager and is subject to frequent changes.