Exchange-Traded Funds – ETF

Exchange-Traded Funds, or ETF’s, combine investing and trading, giving you another tool for becoming a successful investor.

Exchange-Traded Funds – An Explanation: An Exchange-Traded Fund is a stock market security that generally tracks an index, such as NASDAQ, or a group of stocks. ETF’s are similar to mutual funds in that they are a collection of other stocks. This ETF collection of stocks allows you to diversify your money into numerous companies on the stock market by buying a single ETF stock. Exchange traded funds are traded on the markets like any other stock, such as Microsoft (NASDAQ: MSFT), or Anheuser-Busch (NYSE: BUD). You can buy and sell ETF’s as you please. You do not have to wait to buy or sell as in your standard mutual funds.

How ETF’s Work The price of an ETF share is calculated by the value of the individual stocks the ETF tracks. For example, the most popular and actively traded ETF is based on stocks in the NASDAQ 100 – symbol: QQQQ. By buying a share of QQQQ, you are indirectly buying a little piece of all the companies listed in the NASDAQ 100 list. This allows you to invest your money long term, pegged to the value and price of the largest, most popular NASDAQ companies. If the value of NASDAQ 100 as a whole increases, your QQQQ will also increase at the same rate. If NASDAQ 100 gains 1% in a day, then your share of QQQQ will also gain 1% in one day. The same is true for market declines, and you will lose money. The QQQQ allows you to buy a whole basket of stocks, diversifying your holdings across the 100 companies of NASDAQ 100.

Where to Buy and Sell Exchange Traded Funds: You can buy and sell exchange traded funds – ETF – exactly like any other stock market share. For online brokers, such as TD Ameritrade, E*Trade, or Scottrade, you would place your order for an ETF in the same way as your order for SIRI (Sirius Satellite Radio) or WAG (Walgreens). Every stock broker allows you to buy and sell exchange-traded funds.

What kinds of ETFs can I buy? There are over 150 different ETF stocks you can purchase, ranging from stock market indexes (example: QQQQ), to ETFs composed of specific sectors such as defense and aerospace or energy (example: PPA). ETFs also exist for precious metals, such as Gold (symbol: GLD), or Oil commodities (symbol: USO). Other ETFs may track stocks in foreign markets, such as China or India. You are almost guaranteed to find an ETF to suit your investment wants and needs. You just have to do a little digging and research to find the perfect exchange traded fund (ETF) for you.

Popular Exchange Traded Funds:

  • SPDR (Spider) – S & P 500 Index ETF
  • GLD – Gold ETF
  • USO – U.S. Oil Fund ETF

Benefit of ETFs: ETFs have numerous benefits. Most mutual funds have a minimum investment, which can range from $500 or $1000 to $25,000 or more per fund. You must send your money to the mutual fund company, such as Vanguard or T Rowe Price, to purchase the fund. With ETFs, you can buy and sell as you see necessary, through your favorite stock market broker – I use TD Ameritrade. You can buy as little as 1 share, or you can buy thousands of shares of a single ETF, just like you can with stock market investments. Most importantly, your money is (usually!) diversified across a range of stocks – either broadly based such as stock market index ETFs, or focused in sectors such as mining or energy. In my research on Exchange Traded Funds, the most substantial gains come in longer term holding of the ETF stocks, generally speaking over 1 year. Also for stocks held over 1 year, you will end up paying less in capital gains taxes. That being said, there are many traders that regularly daytrade or swing trade ETF stocks, most notably the Nasdaq 100 ETF, QQQQ.

As always, thorough research is necessary for investing and trading anything, even ETF securities. Doing your Due Diligence is one facet of becoming a successful investor. You have the power to become an Investing Winner!