Post by fastwalker on Sept 22, 2004 23:57:51 GMT -5
;D
Spiders, Diamonds, and Investing?
Exchange-traded funds (ETFs) are a type of financial instrument whose unique advantages over mutual funds have caught the eye of many an investor. If you find the tasks of analyzing and picking stocks a little daunting, ETFs may be right for you. Here we define ETFs, highlight their advantages, and list the various ETFs that are available to investors.
What Is an ETF?
Think of an exchange-traded fund as a mutual fund that trades like a stock. Just like an index fund, an ETF represents a basket of stocks that reflect an index such as the S&P 500. (Read more about indexes in this tutorial.) An ETF, however, isn't a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its net asset value (NAV) calculated at the end of each trading day, an ETF's price changes throughout the day. It is important to remember that while ETFs attempt to replicate the return on indexes, there is no guarantee that they will do so. It is not uncommon to see a 1% or more difference between the actual index's year-end return and that of an ETF.
By owning an ETF,
you get the diversification of an index fund plus the flexibility of a stock. Because the ETF is just like a stock, you can short sell an ETF, buy on margin, and purchase as little as one share. Another advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. When buying and selling ETFs, you pay your broker the same commission that you'd pay on any regular trade.
The Various ETFs
The first exchange-traded fund was the S&P 500 index fund, which began trading on the American Stock Exchange (AMEX) in January of 1993. Today—tracking a wide variety of sector-specific, country-specific, and broad-market indexes—over 80 different ETFs trade on the open market. Some of the more popular ones are nicknamed spiders, QUBEs, HOLDRs, iShares, and diamonds. All ETFs are passively managed, which means that investors save big on management fees. Here are some of the most popular ETFs:
QUBEs (QQQs) ..Where CMKX may be headed... ;D
This ETF, whose symbol on the AMEX is "QQQ," represents the Nasdaq-100. Since the Nasdaq-100 consists of the 100 largest and most actively-traded non-financial stocks on the Nasdaq, the QQQ offers broad exposure to the tech sector. Because it curbs the risk that comes with investing in individual stocks, the QQQ is great way to invest into the long-term prospects of the technology industry. The diversification that comes with the QQQ can be a huge advantage when there is volatility in the markets. If a tech company misses its earnings, it will most likely get hit hard.
SPDRs
Usually referred to as "spiders,"
these investment instruments bundle the benchmark S&P 500 and give you ownership in the index. Imagine the trouble and expenses involved in trying to buy all 500 stocks in the S&P 500! SPDRs allow individual investors to own the index's stocks in a cost effective manner.
Another nice feature of SPDRs is that they divide various sectors of the S&P 500 stocks and sell them as separate ETFs. The "technology select sector index," for example, contains over 85 stocks covering products developed by companies such as defense manufacturers, telecommunications equipment, microcomputer components, and integrated computer circuits. This ETF trades under the symbol XLK on the AMEX.
iShares
iShares is Barclay's brand of ETFs. Barclay has put out a number of technology-oriented iShares that follow Goldman Sachs's technology indexes. All these trade on the AMEX.
DIAMONDs
These ETF shares, Diamonds Trust Series I, track the Dow Jones Industrial Average. The fund is structured as a unit investment trust. The ticker symbol of the Dow Diamonds is "DIA," and it trades on the American Stock Exchange.
Conclusion
A great reason to consider ETFs is that they simplify index and sector investing in a way that all of us can understand. If you feel a turnaround is around the corner, go long. If, however, you think ominous clouds will be over the market for some time, you have the option of going short.
Spiders, Diamonds, and Investing?
Exchange-traded funds (ETFs) are a type of financial instrument whose unique advantages over mutual funds have caught the eye of many an investor. If you find the tasks of analyzing and picking stocks a little daunting, ETFs may be right for you. Here we define ETFs, highlight their advantages, and list the various ETFs that are available to investors.
What Is an ETF?
Think of an exchange-traded fund as a mutual fund that trades like a stock. Just like an index fund, an ETF represents a basket of stocks that reflect an index such as the S&P 500. (Read more about indexes in this tutorial.) An ETF, however, isn't a mutual fund; it trades just like any other company on a stock exchange. Unlike a mutual fund that has its net asset value (NAV) calculated at the end of each trading day, an ETF's price changes throughout the day. It is important to remember that while ETFs attempt to replicate the return on indexes, there is no guarantee that they will do so. It is not uncommon to see a 1% or more difference between the actual index's year-end return and that of an ETF.
By owning an ETF,
you get the diversification of an index fund plus the flexibility of a stock. Because the ETF is just like a stock, you can short sell an ETF, buy on margin, and purchase as little as one share. Another advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. When buying and selling ETFs, you pay your broker the same commission that you'd pay on any regular trade.
The Various ETFs
The first exchange-traded fund was the S&P 500 index fund, which began trading on the American Stock Exchange (AMEX) in January of 1993. Today—tracking a wide variety of sector-specific, country-specific, and broad-market indexes—over 80 different ETFs trade on the open market. Some of the more popular ones are nicknamed spiders, QUBEs, HOLDRs, iShares, and diamonds. All ETFs are passively managed, which means that investors save big on management fees. Here are some of the most popular ETFs:
QUBEs (QQQs) ..Where CMKX may be headed... ;D
This ETF, whose symbol on the AMEX is "QQQ," represents the Nasdaq-100. Since the Nasdaq-100 consists of the 100 largest and most actively-traded non-financial stocks on the Nasdaq, the QQQ offers broad exposure to the tech sector. Because it curbs the risk that comes with investing in individual stocks, the QQQ is great way to invest into the long-term prospects of the technology industry. The diversification that comes with the QQQ can be a huge advantage when there is volatility in the markets. If a tech company misses its earnings, it will most likely get hit hard.
SPDRs
Usually referred to as "spiders,"
these investment instruments bundle the benchmark S&P 500 and give you ownership in the index. Imagine the trouble and expenses involved in trying to buy all 500 stocks in the S&P 500! SPDRs allow individual investors to own the index's stocks in a cost effective manner.
Another nice feature of SPDRs is that they divide various sectors of the S&P 500 stocks and sell them as separate ETFs. The "technology select sector index," for example, contains over 85 stocks covering products developed by companies such as defense manufacturers, telecommunications equipment, microcomputer components, and integrated computer circuits. This ETF trades under the symbol XLK on the AMEX.
iShares
iShares is Barclay's brand of ETFs. Barclay has put out a number of technology-oriented iShares that follow Goldman Sachs's technology indexes. All these trade on the AMEX.
DIAMONDs
These ETF shares, Diamonds Trust Series I, track the Dow Jones Industrial Average. The fund is structured as a unit investment trust. The ticker symbol of the Dow Diamonds is "DIA," and it trades on the American Stock Exchange.
Conclusion
A great reason to consider ETFs is that they simplify index and sector investing in a way that all of us can understand. If you feel a turnaround is around the corner, go long. If, however, you think ominous clouds will be over the market for some time, you have the option of going short.
