Exchange Traded Funds (ETF) started in 1993. They provide an investor means of investing into an index that follows a particular sector such as the NASDAQ – 100, Standard & Poors (SP) 500, Dow Jones weighted 30 stock average, large or small capital value growth stocks or bond index. A further classification of ETF breaks it down into three types of funds:
Broad-Based – which invests into different industries, such as those in the Standard and Poors 500 index.
Sector Funds – invests into a particular sector such as health care, biotechnology or oil-related investments. For example the Petroleum Resource Fund (PEO), that invests in oil related companies.
International funds – that purchase stocks or bonds of a specific country. For example the First Israel Fund (ISL), that invests in Israel companies.
Shareholders of an ETF are entitled to receive any dividends and capital gain distributions. The dividends and capital gains usually can be reinvested to receive additional shares, without any brokerage commission or charge. The ETF can be bought, and sold any time when financial markets are open for trading, through a stockbroker. Certainly can be traded intra day. ETF’s can be purchased for any retirement account. Also, can be purchased or sold on margin. When purchasing an ETF prudent to compare brokerage commission charges to pay the lowest fee. Professional stock traders can short an ETF, and not be subjected to short sell up tick rule. A prospectus can be obtained from any Exchange traded Fund. If an investor believes a certain sector of the economy will out perform other sectors of the economy, then investing into a ETF that specializes in that industry, could provide a substantial return on the investment, over a period time. Investors can diversify their portfolio by purchasing different exchange traded funds in different industries rather then investing a limited number of companies. However on negative side of an ETF, if a sector of the economy turns negative, then the underlying investment will decrease in value. Exchange Traded funds are listed in financial periodicals, local newspapers, and on the Internet. Further information can be obtained by contacting a brokerage firm or the fund itself.
Mutual funds invest shareholder money, into stocks, bonds, options or a combination. Contrary to Exchange Traded Funds, mutual funds can diversify their investments in different companies or countries. ETF’s invest in a single industry. Both provide the same dividends, capital gains, and often reinvestments. However, since a mutual fund is diversified, the downside risk is limited compared to an Exchange Traded Fund, where the downside can be worse, for an industry or sector that performs poorly.