Exchange-Traded Funds (ETFs)
Exchange-traded funds (ETFs) are investment companies registered under the Investment Company Act of 1940 that offer shares trading in the secondary market. Some ETFs are structured as open-end management investment companies and some as unit investment trusts (UITs).
In other words, ETFs are baskets of securities that trade like individual stocks. Each ETF is made up of a portfolio of securities tracking a specific sector or general market index. ETFs are not limited to domestic stocks -- some track international stock market indexes and others, bond indexes. There are over 100 ETFs alone listed on the American Stock Exchange.
Features of ETFs include:- Continuous real-time bid and ask quotes and trading during regular market hours
- Visible underlying index
- Generally low expenses (brokerage commissions apply)
- No redemption fees when shares of ETFs are sold (brokerage commissions apply)
- Flexibility -- ETFs can be traded on margin and sold short. Certain ETFs are exempt from the rule that requires shares to be sold short only on an uptick in price.
- Dividend opportunities -- dividends paid by companies and interest paid on bonds held in an ETF are distributed to ETF holders, less expenses. Not all companies held in the ETF, however, pay a dividend.
- Opportunity to diversify a portfolio -- certain ETFs are made up of securities comprising a broad-based equity index, broad-based international or country-specific equity index, sector index, or bond index.
ETFs are designed to provide results that correspond to their underlying indexes; however, these trusts may not be able to replicate the performance of the indexes due to fees and other factors. Each ETF offers a prospectus which provides more complete information about the risks of investing in it, and includes a description of fees and expenses. Please read the prospectus carefully before making an investment decision.
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