Exchange
Traded Funds are a relatively new and exciting investment vehicle,
offering investors flexibility, lower costs and more efficient
investment options.
Many investors still don't know about Exchange Traded Funds (or ETFs)
and their advantages over traditional mutual funds. In this article,
we'll examine Exchange Traded Funds, their history, performance and
advantages and why you should never buy a mutual fund again.
ETF 101
Exchange Traded Funds can most accurately be described as the happy marriage of a stock with a mutual fund.
Like mutual funds, when an investor buys an ETF, he is buying a pool of
securities at one time. For instance, an ETF known as DIA, or
"Diamonds." allows the investor to take a position in the Dow Jones
Industrial Average.
Like a stock, an ETF can be purchased through a brokerage account, can
be traded throughout the day, can be bought on margin and offers
stock-like trading features such as limit orders, stop orders and short
selling
ETFs come in many different flavors. They track all the major indexes
like the Dow, S&P 500, NASDAQ 100, Russell 2000 and others. They're
also available for investors who want to trade sectors like energy,
technology, precious metals, financial, health care, emerging markets,
interest rates and many more.
Introduced over 12 years ago, ETFs were initially mostly used by
professional traders, but in recent years, have experienced rapid
growth as a popular investment vehicle with public investors.
ETFs have gained such widespread acceptance and popularity because they
provide significant advantages over mutual funds. The advantages of
ETFs include:
--Continuous pricing throughout the day compared to end-of-day pricing for mutual funds
--Can be sold short like a stock which isn¡¦t possible with mutual funds
--Can be bought on margin
--Can use limit and stop orders so you can exit or enter during the trading day
--Have lower expenses than mutual funds and no management fees
Adding it all up, it's easy to see why Exchange Traded Funds have been growing at a rate of nearly 50% per year since 1993.
Conclusion:
It's easy to see why Exchange Traded Funds have steadily grown in
popularity over the last twelve years. By combining the benefits of a
mutual fund with the benefits of a stock, they really do offer
investors an optimum combination of flexibility and potential profit.
Of course, the large mutual fund companies don't like ETFs but have had
to adjust to their new popularity and so many fund families have
introduced ETFs of their own in recent years.
For investors, ETFs offer considerable advantages of flexibility, cost
and diversity, and therefore, you should never buy a mutual fund again.
