Similar to stocks, exchange-traded funds (ETFs) can be traded on the stock market. Here we break down what sets them apart.
- Like mutual funds, exchange traded funds, or ETFs, are baskets of securities. ETFs trade on an exchange and can be bought and sold throughout the trading day. They can also be sold short and bought on margin. Anything you might do with a stock, you can do with an ETF.
There are a number of different equity ETFs on the market, including SPDRs, Select Sector SPDRs, mid-cap SPDRs, and Diamonds. ETFs have also branched out into the bond arena, with scores of bond ETFs now on the market. While conventional mutual funds still vastly outnumber ETFs, funds that drill down into specific sectors, industries, regions, countries, and asset classes make up a greater percentage of the ETF universe.
ETFs are still largely passively managed, which means a manager isn't actively choosing which stocks to buy and sell. ETFs rely on an arbitrage mechanism to keep trading prices roughly in line with the net asset values of their underlying portfolios. For the mechanism to work, potential arbitrageurs need to have full timely knowledge of a fund's holdings. So many ETFs have chosen the indexed route because active managers rarely disclose their holdings more frequently than the SEC requires.
Stay financially fit, friends.