Exchange Traded Funds (ETF)

Introduced in 1993, ETFs have gained tremendous popularity. Nearly all ETFs track some kind of index. ETFs are often compared to mutual funds but there are several distinct differences.

ETFs (at least the "real" ETFs that share a set of exemptions from the Investment Company Act of 1940) disclose their positions every 15 seconds via Specialists (exchange professionals who match up buyers and sellers) whereas mutual funds disclose their holdings every quarter.

Since large investors can buy ETFs and subsequently swap them for their underlying shares, this frequent disclosure keeps ETFs' prices closely tied to those of their underlying indices, adding a sort of additional stability not found in mutual funds.

Exchange-traded funds, like traditional open-end mutual funds, are legally set up as trusts separate from the bank corporations. The assets within these trusts cannot be touched during bankruptcy proceedings, as they belong wholly to the shareholders of the fund.

NAV vs. Actual Price

The NAV is the *estimated* value of all the assets the ETF holds. NAV is priced throughout the trading day. The actual price of the ETF is what it sells for on the stock market. The difference between NAV and actual price can vary (premium or discount). The ETFs are *supposed* to have minimal variance between NAV and actual price (unlike closed-end mutual funds).

Learn the advantages, disadvantages, risks, questions to ask before investing, and much more...

For the rest of the article and full site access, please subscribe now.