What are ETF's?

ETF's are a type of securities certificate that determine the legal owner over part of a number of individual stock certificates. ETF's trade on stock exchanges just like regular stocks do, and they also pay dividends. They are different from regular stocks, however, in that they track an entire stock index, rather than just one company.

Confused? Basically, by buying exchange traded funds, you'll get the same benefits of diversification as you will with a mutual fund, but in the form of an investment that is acts like a stock. Many people refer to EFT's as "passive investments," as there is nobody in charge of choosing which companies the ETF should buy or how much it should buy. It automatically tracks the index, so nobody has to pick and choose stocks.

History of Exchange Traded Funds

ETF's first came to North America just back in 1993, when Standard & Poor's Depositary Receipts (AMEX:SPY) started.
Since that time, the ETF market has grown a great deal, and newer ETF's even track particular sectors within a larger index. Some of the international ETFs may also track commodities or currencies.

Pros of ETF's

*relatively low cost, so appealing to buyers (they have a lower annual expense fee than mutual funds)
*trading flexibility: they can be bought or sold at anytime of the day, unlike most types of mutual funds or index funds. ETF's can be bought on margin, sold short, be bought at a certain price, and be stopped to limit losses.
*more tax efficient, as they buy/sell stocks only when the underlying index changes

Cons of ETF's

*trade like stocks, so you pay every time you buy or sell, not a set amount of money each month
*may not be able to get advice from financial advisors on your ETF, as they don't pay commissions

Still confused? ETF's can be difficult to understand, so if you're new to the money market and are interested in learning more about ETF's, talk to a financial advisor or broker who can help.