Exchange-traded fund introduction

Exchange-traded fund

An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.

A new investing trend of increasing importance is the exchange-traded funds (ETFs). These new financial assets have some characteristics of index mutual funds, closed-end funds, and even individual stocks. An ETF is a basket of stocks that tracks a particular sector, investment style, geographical area, or the market as a whole.

ETFs have characteristics of both direct and indirect investing.

TYPES OF ETFS

1. Broad Domestic Market Index ETFs

ETFs that fall into this category track a market index. They follow an index based on a country’s stock market and are usually the most active ETFs on that exchange.

2. Style ETFs

Some ETFs track a certain investment style or market capitalization (large-cap, small-cap). Style ETFs are most actively traded in the United States and exist on growth and value indexes developed by S&P / BARRA and Russell.

3. Sector or Industry ETFs

ETFs that fall into this category track a sector index or a basket of stocks representing a certain industry.

4. Country or Region ETFs

There are certain ETFs that track the performance of foreign country and regional indexes. This is one of the fastest-growing segments of ETF categories