An Overview of ETFs

An exchange traded fund is a group of investment funds and exchange traded products, i.e. they are usually traded on major stock exchanges like NYSE and NASDAQ. Similar to mutual funds, ETFs are purchased and sold through the market on a regular basis, though ETFs typically operate in a closed system that does not require regular opening and closing. ETFs have been compared to actively managed mutual funds in that they both invest in securities through an overall manager or administrator, though in reality an ETF does not offer the level of individual management as an actively managed mutual fund can, and since ETFs trade more precisely than mutual funds they tend to have less volatility.

Since ETFs follow an overall investment theme, much like mutual funds, most are designed to provide growth or income producing investments that will earn a profit over time. Much like mutual funds, ETFs can be classified in a variety of ways. Common types of ETFs include equity indexed funds and growth-oriented funds. Both equity indexed and growth oriented ETFs follow the general principles of creating a diversified portfolio by investing in a wide array of the most profitable stocks and bonds. They differ from mutual funds in that instead of buying individual stocks and bonds, they purchase company stocks and bonds, which they then trade like stocks on major exchanges.

Investing in ETFs allows you to tap into the volatility of the stock market, but since these are typically very volatile there is also a greater degree of risk. The volatility of ETFs makes them highly sensitive to changes in the market, especially when the market closes for the night. At that point most traders move their investments to lock in profits and limit losses, especially since most ETFs do not offer any sort of guaranteed returns. The larger cap size of actively managed ETFs typically results in greater volatility. These actively managed funds follow the same overall investment theme as mutual funds, but instead of being bought and held by individual investors, they are purchased by professional investors who manage the portfolio for the fund’s account. While mutual funds generally follow a well established investment theme, ETFs tend to vary more in terms of style.