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An exchange traded fund is an investment vehicle or security that behaves like a stock in that it can be regularly traded on any number of exchanges, but specifically tracks an index or indexes, commodities, bonds, or other assets. Its daily price may change during the trading day, as its shares are constantly being bought and sold by investors, so its net asset value is not calculated on a daily basis, as occurs with a mutual fund that determines its net asset value at the close of the market each day. ETFs tend to trade near their current net asset value during the course of a trading day.
ETFs are attractive to investors because they tend to track an index or indexes, have relatively lower costs than some mutual funds, and do not incur the same type of tax consequences as a typical mutual fund.
ETFs have been available to investors in the United States since 1993, and to European investors since 1999. Although index funds from their inception were allowed to
An exchange-traded fund behaves like a stock, while tracking specific bonds, indexes, commodities, or other assets.
track various market indexes, it was not until 2008 that the SEC allowed ETFs to be more actively managed, allowing managers of ETFs to purchase investments that appear to be undervalued or to sell short investments that may be overvalued, as indicated by share prices that may be falling in the near term.
You may purchase shares of various ETFs by contacting your investment broker, or by using any number of online brokerage firms. Although ETFs may track a benchmark index and have low management fees, investors still must pay commissions when purchasing or selling shares.
Some of the more notable ETFs include the NASDAQ Tubes" (tracks NASDAQ-100), Dow "Diamonds" (tracks the DJIA), and various "Spiders" (tracks Standard & Poor's 500 or a component of the index).
Some of the most influential stocks used as components within many ETFs include Apple Computer, Exxon/Mobil, Microsoft, Google, and Chevron.
Since exchange traded funds generally try to mimic the holdings and performance of various market indexes, if any heavily weighted individual share within an index experiences a severe drop, the market in general may experience a severe drop, and the ETF may experience an even worse drop. Since the prices of the underlying exchange drop precipitously, the prices of the ETF may also drop, and few buyers of the ETF may be found, further deflating the price of the ETF, thus affecting its liquidity.