ETF Investing
An ETF (Exchange Traded Fund) can be similar to an index fund. The major difference, an ETF trades on a stock exchange like a security. You do not have to contact a mutual fund family to buy or sell an ETF. You can use the services of a broker/dealer to trade an ETF like you would any other security. Trading is fast, easy, and cheap.
A Brief History
The first ETF was established in 1989 with an S&P 500 fund that traded on the American Stock Exchange. Barclays began marketing World Equity Benchmark Shares (WEBS) in 1996. WEBS, which was set-up as a mutual fund, was popular because it gave individual investors an easy, low cost way to invest in global markets. Over the years numerous companies introduced increasingly innovative ETFs. Today there are more than 1,700 ETFs with a market value of almost $2 trilllion.
Index Fund ETFs
ETFs and index funds serve identical purposes. They duplicate the performance of asset classes (Russell 2000), benchmarks, and indexes (S&P 500).
Active Management ETFs
Historically, ETFs in the United States were all based on index funds. However, pursuant to an SEC ruling in 2008 a new type of ETF began providing actively managed ETFs. Some ETFs invest primarily in commodities or commodity-based instruments, such as oil and precious metals. Instead of duplicating the performance of indexes these ETFs duplicate the performance of baskets of stocks and other types of investments that have common characteristics.
Automation, Risk, Expense
Index ETFs share the same characteristics as index funds for automated investing, risk, and expense. Actively managed ETFs may have the same risk and expense characteristics as other actively managed mutual funds.
Match the Market
Index ETFs are designed to match the performance of market indexes. Actively managed ETFs seek to produce above market returns.
Paladin Says.....
ETFs are your best alternative if your goal is market returns with lower risk and expense. Broadly diversified ETFs with low turnover are a lower cost investment for people with lower risk tolerances.