A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Tuesday, October 19, 2004

What are Exchange-Traded Funds?

Stated in the simplest of terms, Exchange-Traded Funds (ETF) are index mutual funds that trade like an individual share of stock. There are ETFs for practically any sector or market imagined.

The advantage to using ETFs is that if a person doesn't want to index the broad market, they could buy individual ETFs that cover the areas they are interested in. For instance, a person could just buy an ETF that covered biotechnology. Although it is risky to buy just one sector like biotechnology, it is less risky to do so than just buying a couple of biotech stocks.

To learn more about ETFs, go to iShares. IShares is one of the biggest providers of ETFs. They have put together a really nice website to help individuals understand ETFs. Another good website to check out is Ameritrade's ETF section. They have a ton of information regarding ETFs to help people make informed decisons.

Now before running out and buying an ETF, it is important to understand that since the ETF is essentially a "stock," buying shares will require a transaction fee. In other words, there is no free lunch. Therefore, it might be prudent to use ETFs in a long-term buy and hold strategy rather than trying to trade them. Also, regular index funds may be better for those people who are trying to build wealth by dollar-cost averaging since most index funds don't charge a fee every time a purchase is made (as long as their minimums are met).

Good luck!