Exchange-Traded Funds ETFs are relatively new to the US market, having been introduced only in 1993. ETFs allow investors to follow the performance of key indices and sectors while providing the flexibility and instant liquidity lacking in traditional mutual funds.
There was a time when mutual funds were the most accessible entry to professionally-managed diversification. However, professional management has a price, and after the active managers have collected their paychecks, approximately 80 of mutual funds underperform the average stock market return. Index funds, which are automated mutual funds that track a stock market index, have lower annual fees but that is an article for another day. ETFs differ from mutual funds in that they can be traded like a stock. ETFs allow intraday trading, unlike mutual funds, which are only traded for the net asset value at the end of the day. The fact that ETFs are traded like stocks also means that they can be shorted, bought on margin, or placed on limit orders. Options are also available.
Finally, ETFs have tax benefits over traditional mutual funds. Actively managed fund shareholders pay taxes on all the capital gains that the fund owns while they hold their shares, as opposed to just paying taxes on their personal capital gains.
Now, onto the ETFs. There are more than 300 of them, and here are some of the most popular ones:
SPDRs State Street Global Advisors SPY tracks the S amp; P 500 PowerShares QQQ QQQQ tracks the NASDAQ-100 index iShares Russell 2000 Index Fund IWM tracks the Russell 2000 index Here are a few that I am partial to:
streetTRACKS Gold Shares GLD invest in gold without the risk of buying gold futures or the hassle of storing gold bricks in your home SPDR S amp; P Metals amp; Mining XME tracks the S amp; P Metals amp; Mining index iPath S amp; P GSCI Crude Oil Tot Ret Idx ETN OIL tracks the Goldman Sachs Crude Oil Return Index Lately, it has been easier to target sectors to stay away from than ones to invest in. These bear-market ETFs can do the shorting for you:
UltraShort Financials ProShares SKF corresponds to the inverse of the Dow Jones US Financials index UltraShort Real Estate ProShares SRS corresponds to the inverse of the Dow Jones US Real Estate index UltraShort FTSE Xinhua China 25 Proshare FXP corresponds to the inverse of the FTSE Xinhua China 25 index Rydex Inverse 2x S amp; P 500 RSW corresponds to the inverse of the S amp; P 500 All of these can be traded an AMEX, NYSE, or NASDAQ.
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