Understanding the Basics of ETFs

The original idea for the exchange-traded fund is nearly 30 years old. Started in 1989, it was initially called Index Participation Shares. The innovative new product was designed to be a proxy for the S&P 500 but it could also be traded on an exchange like a stock. It became a popular investment vehicle for both small and large investors.

HOW ETFs WORK

The acronym ETF stands for an Exchange Traded Fund. At its foundation, it is a type of investment fund that owns assets – which can include stocks, commodities, futures or currencies – but has its ownership divided into shares that trade on stock exchanges. Investors can buy and sell ETFs at anytime during trading hours. Just like stocks, each ETF has a ticker symbol and is priced in real-time. One major exception to being like a stock is that the number of ETF shares outstanding can change daily based on the share creation and redemptions.

BENEFITS OF ETFs

ETFs have a wide range of benefits. They are simple to buy and sell and provide an inexpensive, transparent way to easily access to many different asset classes and thematic exposures. ETFs are tax efficient allowing investors to move in and out of the markets quickly. Many investors like that it is an easy to diversify their portfolios.

CONCERNS WITH ETFs

ETFs are not without concerns. Some ETFs are very thinly traded, providing wide bid/ask spreads and low liquidity. In addition, there can also be situations where technical issues can cause a tracking error that causes a performance gap between the ETF and the index it tracks. Settlement times may also take several days.

ALL THINGS ETF

The infographic from StocksToTrade.com is a quick, but comprehensive overview to ETFs. It highlights the basics concerning ETFs, including how they work, the type of assets they track, and some of the the pros and cons of ETF investing.