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How Do Exchange Traded Mutual Funds Work?

how-do-exchange-traded-mutual-funds-work

There are two basic ideas anchoring the concept of exchange traded mutual funds (ETFs). The first is to enable investors to quickly establish a diversified portfolio of stocks and bonds, without having to individually buy each one of those stocks or bonds. The second is to provide a mutual fund that can be traded just like a stock, throughout the market day, for optimum flexibility.

Nimble Features

Exchange traded mutual funds are generally narrowed down to unifying geographical region, company size threshhold or industry vertical. As such, these funds allow investors to safely gain traction in an area of chosen financial specialization.

Because ETFs do not require the selling of holdings to meet shareholder redemptions, they can be a lower capital gains tax burden than traditional mutual funds. They also have a much higher level of transparency, with price points of the different portfolio elements updated throughout the day. Other advantages of ETS include lower commission expenses and an ability to mix and match within larger ETF families.

Different ETF Types

The first step for anyone choosing to invest in ETFs is to settle on the type they want. The main types are Broad Market, Niche, Exotic, Leveraged and Inverse.

Broad Market and Niche are, per their names, ETFs that respectively track a wide and narrower range of stocks and bonds. Exotic ETFs zero in on things like currency and commodities, while Leveraged are intended to move faster than the indexes they track and Inverse are designed to go in the opposite direction of a particular market index.

Topping the $1 Trillion Mark

At the turn of 2011, ETFs, a.k.a. “stock funds”, crossed a major milestone: $1 trillion in total investment. U.S. investors pumped in $19 billion into ETFs in December, 2010, to bring the year-total to $122 billion. The largest U.S. ETF, SPDR S&P 500 ETF, now amounts for a staggering $90 billion of this new, record-breaking $1 trillion plus total.

 

Resources

Schwab.com – Exchange Traded Mutual Funds, Retrieved January 25, 2011 from http://www.schwab.com/public/schwab/research_strategies/etf

Schwab.com – Types of ETFs, Retrieved January 25, 2011 from http://www.schwab.com/public/schwab/investment_products/etfs/etf_learning_center?cmsid=P-3313054&lvl1=investment_products&lvl2=etfs

USA Today – “Exchange Traded Fund Assets Top $1 Trillion for the First Time”, January 6, 2011, Retrieved January 25, 2011 from http://www.usatoday.com/money/perfi/funds/2011-01-06-funds06_ST_N.htm

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