What Are Exchange-Traded Funds All About? - dummies

What Are Exchange-Traded Funds All About?

A share of an ETF (exchange-traded fund) represents ownership (most typically) in a basket of company stocks. To buy or sell an ETF, you place an order with a broker, either by phone or online.

Unlike a regular mutual fund, where the Net Asset Value is generally calculated at the end of the trading day, an ETF allows you to trade throughout the day. Furthermore, you can both go long and be short with the ETF, something you can’t do with regular mutual funds.

One of the downsides of investing in ETFs is that they can be fairly volatile because they track derivative instruments that trade in the futures markets.

The price of an ETF changes throughout the trading day, which is to say from 9:30 a.m. to 4:00 p.m. Wall Street time, going up or going down with the market value of the securities it holds. (Sometimes there can be a little sway, but rarely anything serious.)

Originally, ETFs were developed to mirror various indices:

  • The SPDR 500 (ticker SPY) represents stocks from the S&P (Standard and Poor’s) 500, an index of the 500 largest companies in the United States.

  • The DIAMONDS Trust Series 1 (ticker DIA) represents the 30 underlying stocks of the Dow Jones Industrial Average index.

  • The NASDAQ-100 Trust Series 1, otherwise known as Qubes (ticker QQQQ), represents the 100 stocks of the NASDAQ-100 Index.