INVESTMENT Term of the Day - #2 - Exchange Traded Fund (ETF)

An ETF, or exchange traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Not like a mutual fund, an ETF trades like a common stock on a stock exchange. ETF prices changes throughout the day as they are traded either bought and sold. ETFs usually have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors. Fees for passive ETFs usually range from 0.10% (10 basis points) to 0.60% (60 basis points). A passive ETF tracks a basket of goods and is not picked by an investment professional. For active ETFs their fees can be a little higher but not as high as mutual funds (2%+ (200 basis points)).

As ETFs are traded throughout the day, to keep the ETFs fair value, it is arbitraged by traders.

As it is known that most investment professionals do not beat the market on a consistant basis, an ETF allows you track the market in an inexpensive way and receive the market return depending on if you invest in index specific ETFs or total market index ETFs.

Examples of Widely Traded ETFs

One of the most well known and traded ETFs thst tracks the S&P 500 Index is called the Spider (SPDR), and trades under the ticker SPY.
The symbol QQQ tracks the Nasdaq 100, and the DIA tracks the Dow Jones Industrial Average.
Sector ETFs exist which track individual industries such as oil companies (OIH), energy companies (XLE), financial companies (XLF), REITs (IYR), the biotech sector (BBH), and so on.
Also there are ETFs that track foreign stock market indices for most developed and many emerging markets. Furthermore there are ETFs which track currency movements worldwide.