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What Are Exchange Traded Funds?

Aug 17, 2007
Exchange Traded Funds represent the shares of ownership in either fund, unit investment trusts, or depository receipts that hold the portfolios of common stocks that closely track the performance and the dividend yields of specific indexes, either broad market, sector or international.

Exchange Funds give the investors the opportunity to buy or sell an entire selection of stocks in a single security, as easily as buying or selling a share of stock. Exchange Funds offer a wide range of investment opportunities.

Exchange Traded Funds also called, as the ETFs can also be understood as open-ended collective investment schemes, traded as shares on most of the global stock exchanges. They try to replicate a stock market index for instance the S&P 500 or Hang Seng Index, a market sector for instance energy or technology, or a commodity as an example gold or petroleum.

Understanding the Exchange Traded Funds

While it may seem to be similar to an index mutual fund, Exchange Funds differ from mutual funds in many significant ways. Unlike Index mutual funds, Exchange Funds are priced and can be bought and sold all the way through the trading day. Furthermore, Exchange Funds can be sold short and bought on margin too.

Well! Now, single securities, known as Exchange Traded Funds (ETF), can track the performance of an increasing number of diverse index funds such as the NSE Nifty. Most Exchange Funds represent a portfolio of stocks that are very well designed to track one specific catalog.

Exchange Funds can be bought and sold exactly like a stock of an individual company during the entire trading day. In addition, they can be bought on margin, sold short or bought at specific limit prices. Exchange Funds can help investors build a diversified portfolio that is easy to track.

Exchange Funds trade like shares while providing the diversification of managed funds. Their presentation closely tracks the investment returns of the shares making up for the index.

Well! Exchange Traded Funds can be the cheap and the most fairly valued ones. Perhaps the most important, although subtle, benefit of an ETF is the stock-like features that are offered.

Since Exchange Funds trade on the exceptional market, investors can carry out the same types of trades that they can with a stock. For example, investors can sell short, use a limit order, use a stop-loss order, buy on margin, and invest as much or as little money as they wish, as there is no rule of minimum investment requirement.

Many Exchange Funds have the capability for options to be written against them whereas Mutual funds do not offer such features.

As a working example, an investor in an open-ended fund can only purchase or sell at the end of the day at the mutual fund's closing price. This makes stop-loss orders much less useful for open-ended funds.

That is, if your broker even allows them. An Exchange Traded Funds is continually priced throughout the day and therefore is not subject to this disadvantage, allowing the user to react to undesirable or beneficial market condition on an intraday basis.

Another advantage is that Exchange Funds like the closed-ended funds are immune from some market timing problems that have plagued open-ended mutual funds. In these timing attacks, large investors trade in and out of an open-ended fund swiftly, exploiting minor differences in price in order to profit at the expense of the long-term unit holders.

Thus, with an Exchange Funds or say a closed-ended fund such an operation is not possible--the underlying assets of the fund are not affected by its trading on the magnificent market.

Exchange Traded Funds like any other kind of Investment Company will have a prospectus. All investors that purchase Creation Units get a prospectus.

Some Exchange Funds also deliver a prospectus to secondary market purchasers and the ones that do not deliver a prospectus are required to give investors a document known as a Product Description, which summarizes all the key information about the ETF and explains how to get a prospectus.

All Exchange Traded Funds will deliver a prospectus when asked for, as they do not use profiles. Exchange Funds are legally structured as open-end companies and must also have statements of additional information.

Open-end Exchange Traded Funds must be able to provide shareholders with annual and semi-annual reports before buying shares; you could carefully read all of Exchange Funds available information, including its prospectus.

The website of the American Stock Exchange provides more information about numerous styles of Exchange Traded Funds and how they work. You can easily Uncover detailed information about Exchange Funds resting on the website of The NASDAQ Stock market too.
About the Author
William Smith the author provides much more financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at Exchange Traded Funds (All is Free)
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