Wednesday, June 18, 2008

What is an ETF?

I honestly have hard time reading books about investing without my eyes glazing over. Saving is much easier and I like to see my bank account grow. But as I know investing is an important way for me to meet my personal finance goals, I’m trying to educate myself in baby steps. My first step is figuring out what exactly an ETF is and whether I should consider investing in them when I crush my credit card debt and meet a few other financial goals.

According to the Wikipedia definition, an Exchange Traded Fund (ETF) is:

An investment vehicle traded on stock exchanges, much like stocks or bonds. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the Dow Jones Industrial Average or the S&P 500. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.

A few tidbits about ETF’s:

  • Apparently, there are four types of ETF’s: Index, Commodity, Actively Managed, and Exchange Trader-grantor trusts.
  • ETFs trade on an exchange. Each transaction is subject to a brokerage commission.
  • ETFs are structured for tax efficiency and can be more attractive than mutual funds.
  • Since ETFs trade on the market, investors can carry out the same types of trades that they can with a stock.
  • Well known companies such as Vanguard and Fidelity offer ETF’s.
  • For more information on ETF’s visit CNN Money’s page about them.

Do you have any ETF’s or plan to invest in them in the future?


Money Maus said...

I picked up the latest "Money" magazine at the airport and they had a long article about investing - and it was all about investing in mutual funds! I noticed that there were also recommendations for ETFs and that ETFs also had lower (!) expense ratios that even index funds, especially at Vanguard. They sound neat! Not sure if I will use those once I get going on my retirement savings... Good luck!