What exactly are ETF's?

Introduction
Exchange-Traded Funds, or ETFs, are similar to mutual funds that trade on stock exchanges, with a few important differences. This gives them many of the benefits of stocks while avoiding some of the downsides that mutual funds have.

Why Use ETFs
Have you ever wanted to buy shares of an index like the Dow Jones Industrial Average? You can't do that but you can do it using ETFs. The managers who supervise ETFs usually invest in the same stocks or futures that make up an index or commodity in an effort to make the ETF's value per share track a certain index or commodity up and down. This allows people with access to stock trading the ability to easily buy and sell indexes or commodities indirectly.

Example: SPY - SPDR Trust Series I:
One of the most actively traded ETFs is SPY, who's goal is to track the price and performance of the S&P 500 index. It will not be the same price as the index but its chart should have the same shape as the index, within one or two percent most of the time.

Example: QQQQ - PowerShares QQQ Trust, Series 1:
The stated purpose of this fund is to track the Nasdaq-100 index by issuing and redeeming shares of the stocks that make up the index.

Example: EEM - iShares MSCI Emerging Markets Index Fund:
This ETF looks to track the price and performance of the MSCI Emerging Markets index, which follows the performance of international stocks. This fund is non-diversified. This means it is not as safe as other funds because it is focused on a specific sector.

Example: USO - United States Oil Fund LP:
This commodity ETF tracks the performance of oil, West Texas Intermediate light, andsweet crude oil. They do this by continually buying and selling futures contracts for oil, natural gas, and several other things. It is also non-diversified but a easy way to invest in oil prices.

Benefits of ETFs
The main benefits of ETFs include diversity, the same tradability as stocks, low costs, tax efficiency, and transparency of assets.

What are ETFs
ETFs are are funds that can be structured in a few different ways. They are usually passively managed, which means the managers do not have to constantly decide which investments need to be bought and sold in order to increase the value of the fund. Instead, the managers simply have to make sure the fund tracks a certain index or commodity as closely as possible, which can be as simple as owning the stocks that make up an index and adjust the shares accordingly so that the price follows the index's chart.

Where to Find Them
You can learn more about ETFs at brokerages, offer a free stock screener, along with an ETF screener. Yahoo! Finance has a good site that lets you view a list of the performers in several different categories.

For detailed information on the stock market see our website: http://HowTheMarketWorks.com.