What Are ETFs?

What are ETFs?

It is a question asked by many beginner investors, since Exchange-Traded Funds (that’s what the acronym ETF stands for) are a very popular investment mechanism. While ETFs have been around for about 20 years, their popularity has increased only during the past decade or so. Thus, when looking at what ETFs are, we should focus on several key aspects.

The most important thing one should know about an ETF is that it is an investment fund, and even though it has many similarities with mutual or index funds, the price of ETF shares can rise and fall during the day, which gives speculative investors an opportunity to take advantage of intraday price fluctuations. The prices of some other types of investment funds are calculated only after the market is closed and the same price is offered for all investors. This, combined with low costs and fees, makes it easy to understand why ETFs are the soup de jour for investors hoping their retirement will be filled with many spectacular places to visit in their elderly years.

At the same time, ETFs, being investment funds, give their investors the possibility to invest in a basket of companies, basically like mutual funds or index funds. However, in this matter, ETFs are closer to index funds, because many ETFs are also following certain indices from the market. But, unlike index funds, an ETF doesn’t have the goal to beat a particular index, but they rather follow its activity.

Donald Yacktman

*Donald Yacktman (pictured above), manager of Yacktman Asset Management, has ties to Yacktman Focused Fund Service Class (YAFFX).

The similarities between ETFs and stocks is also an advantage taken into consideration by investors. Aside from the aforementioned intraday price volatility of an ETF, there are a couple of other points, such as the possibility of going long or short on an ETF. Also, an investor who considers going into ETFs does not have any restrictions in terms of an invested amount, being able to buy as much as even one share.

So, ETFs look like an interesting investment opportunity, combining positive aspects of both investment funds and stocks. An investor who considers putting some money into an ETF has the possibility to choose from several hundreds of ETFs, the largest of which we will mention below. In terms of trading volume, the largest of all is the SPDR S&P 500 ETF Trust (NYSEARCA:SPY), with daily trading volume of over $132.5 million and assets under management of over $150.4 billion. As it comes from the name, the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) follows the activity of the S&P 500 index. The second and third largest, we should mention are the iShares MSCI Emerging Markets Indx (ETF) (NYSEARCA:EEM) and iShares MSCI Japan Index (ETF) (NYSEARCA:EWJ), with average trading volume of $72.4 million and $52.4 million respectively.

In conclusion, ETFs represent profitable exchange-traded products, and are worth taking a look at. Their advantages, like price flexibility, low costs and attractive tax efficiency are actually what make ETFs look good in comparison with their peers from the investment universe.

If you’re still asking the question, “what are ETFs,” you can look at one ETF that will prepare you for the next stock market crash.

Disclosure: none

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