ETFs

Description

An ETF (Exchange Traded Fund) is an index-tracking fund run by a managing company. ETFs are traded like stocks, and can be bought and sold throughout the trading day on the exchanges.

The first ETF was issued in 1993, when the American Stock Exchange launched the 'Spiders' (more fully called S&P Depositary Receipts, Trust Series 1), which tracked the S&P 500.

Today over 400 ETFs are traded. Popular ETFs include

Spiders, already mentioned, still the biggest and most popular.

Nasdaq-100 Index Tracking stock - includes a 100 of the largest companies on NASDAQ.

DIAMONDS trust, which tracks 30 shares (selected by the Wall Street Journal) from the Dow Jones Industrial Average.

S&P's MidCap 400 - consists of medium sized companies.

Equity-based ETFs have now been joined by Bond-based ETFs. These track a range of fixed-income bonds, from Treasuries to Mortgage Backed Securites to junk bonds.

The biggest advantage of ETFs is that annual fees expenses are relatively low - running an index-tracking fund is relatively simple. Annual fees are typically in the region of 0.4% for an ETF, 0.7% for an index-tracking Mutual Fund, and 1.4% for an actively managed Mutual Fund.

ETFs can be traded through a broker just like any other share, with the normal dealing costs. The trading price of an ETF is approximately the same as the value of the underlying securities plus any undistributed income.