Exchange Traded Fund or ETF is a fund that tracks an index, but can be traded like a stock.
They are like stocks because they:
• trade all day long on the major stock market exchanges (mostly on the AMEX)
• ETFs can be handles like regular stocks, which means short-sold, bought on margin, etc.
• You need a broker to purchase ETFs
They are like funds because they
• hold hundreds or thousands of companies combined by a particular investing theme
The advantages of ETFs are that:
• Via ETFs you can invest in anything ranging from bonds, REITs, and the utility sector to S&P 500.
• You can avoid the minimum balance requirements and sales loads of the mutual funds
• ETFs are more tax-efficient
• You can take advantage of lower expense ratios that range between 0.1% and 0.65% as compared to the range of 0.1% to more than 3% typically charged by index mutual funds. ETFs enable these savings as they shift shares less frequently.
• All you need to trade in ETFs is a discount brokerage account.
The downside includes:
• You need to pay a commission to a broker every time you trade an ETF.
• ETFs don’t offer direct investment programs, so it is not easy to follow dollar-cost averaging investment program with ETFs.