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What
is an ETF?
An ETF is an investment vehicle traded on stock
exchanges, much like stocks. An ETF holds assets
such as stocks or bonds and trades at approximately
the same price as the net asset value of its underlying
assets over the course of the trading day. Most
ETFs track an index, such as the Dow Jones Industrial
Average or the S&P 500. ETFs may be attractive as
investments because of their low costs, tax efficiency,
and stock-like features. In a survey of investment
professionals conducted in March 2008, 67% called
ETFs the most innovative investment vehicle of the
last two decades and 60% reported that ETFs have
fundamentally changed the way they construct investment
portfolios.
Only so-called authorized participants (typically,
large institutional investors) actually obtain or
redeem shares of an ETF directly from the fund manager,
and only then in creation units, large blocks of
tens of thousands of ETF shares that can be exchanged
in-kind with baskets of the underlying securities.
Authorized participants may hold the ETF shares
or they may act as market makers on the open market,
using their ability to exchange creation units with
their underlying securities to provide liquidity
of the ETF shares and help ensure that their intraday
market price approximates the net asset value of
the underlying assets.
Other investors, such as individuals using a retail
brokerage, trade ETF shares on this secondary market.
An ETF combines the valuation feature of a mutual
fund or unit investment trust, which can be purchased
or redeemed at the end of each trading day for its
net asset value, with the tradability feature of
a closed-end fund, which trades throughout the trading
day at prices that may be substantially more or
less than its net asset value. Closed-end funds
are not considered to be exchange-traded funds,
even though they are funds and are traded on an
exchange. ETFs have been available in the US since
1993 and in Europe since 1999. ETFs traditionally
have been index funds, but in 2008 the U.S. Securities
and Exchange Commission began to authorize the creation
of actively-managed ETFs.
RELATED NEWS ARTICLE FROM USA TODAY
One of the fastest-growing and most popular investments on Wall Street is threatening to burn investors unaware of the risks, regulators say.
Exchange traded funds, mutual fund-like baskets of securities that trade like stocks, possess hidden downsides that could hit unaware investors, the North American Securities Administrators Association cautioned Monday.
