Defining Etfs

Exchange-Traded Funds (ETFs) were started in Canada and have been in the United States since 1993. The makeup of these ETFs is very similar to many mutual funds but they behave very differently.

ETFs range from large indexes of stocks, such as the Standard & Poors 500 to a single commodity, like the gold and silver ETFs. Most ETFs, like mutual funds, contain a basket of stocks. These stocks may be an index of stocks or may contain stocks from a particular industry such as pharmaceuticals, commodities, oil, or general energy stocks.

While the content of a mutual fund and an ETF may be similar, the way they are traded is quite different. Most mutual funds require a minimum investment to open the fund. Many funds have fees. They are liquid. You can buy and sell funds, but not as quickly or easily as you can buy and sell stocks.

With ETFs, you pay your broker’s fee for trading and that is it. You can buy and sell an ETF the same as you would buy or sell any stock. You can have the safety and diversity of a mutual fund with a large basket of stocks, along with the liquidity of real-time buying and selling.

Whereas some mutual funds are managed, which means that stocks may be added and deleted regularly, ETFs tend to remain more static. Managed mutual funds are a little more costly because of management fees.

While ETFs are similar to mutual funds when it comes to indexes or baskets of stocks, they are unique when it comes to following more narrow investments. This is exemplified by ETFs that follow a single product, such as the gold and silver ETFs. These do not follow a basket of precious mining companies but try to closely follow the daily spot price of gold and silver. This means that these ETFs have to actually buy the physical gold and silver to back up their sale of shares.

One measure of the success of these narrowly focused ETFs is the fact that one gold ETF, StreetTracks Gold (GLD) has the eighth largest holding of gold in the world.

The variety and popularity of ETFs is increasing daily. The wise and careful
purchase of a few selected ETFs can be a boon to any portfolio.