Exchange Traded Funds (ETFs)

What are Exchange Traded Funds (ETFs)? Exchange Traded Funds (ETFs) are open-ended investment funds listed and traded intraday on a stock exchange. They aim to track the performance of an index and provide access to a wide variety of markets and asset classes. ETFs are not mutual funds, yet they offer all of the benefits of diversification that you would expect from a mutual fund. Quick Facts: ETFs are the most innovative and rapidly growing investment vehicles. The first ETF ever issued was the Standard and Poor's Deposit Receipt, or the SPDR S&P 500 (SPY), which began trading in 1993. Like stocks, ETFs trade on an exchange. Unlike regular mutual funds, ETFs can be bought and sold throughout the trading day. They can also be sold short and bought on margin. Anything you might do with a stock, you can do with an ETF.  There are a number of different ETFs on the market, including Qubes, SPDRs, sector SPDRs, MidCap SPDRs, HOLDRs, iShares, and Diamonds. Most ETFs are passively managed, which means that each tracks a sector-specific, country-specific, or broad-market index. A manager isn't actively choosing which stocks to buy and sell. There are 894 ETFs with assets of $887.2 billion from 28 providers on two exchanges (Dec 2010). There are $12 trillion in mutual funds, but the momentum is shifting. In fact, seven of the 10 best-selling funds are ETFs. Why invest in ETFs? Exchange-traded funds offer the following advantages: Lower investment cost : ETFs have lower expense ratios than index and mutual funds, generally less than 1%. Transparency: Investors have access to the component securities represented in an ETF. Moreover, market prices are published real-time throughout the trading day. Flexibility & liquidity: An investor can buy and sell ETFs anytime during trading hours and may employ the traditional trading techniques including stop orders, limit orders, margin purchases, and short sales. In today's markets with increased volatility, the ability to capture short-term movements can make the difference between a good day and a bad one. Diversification: ETFs provide instant diversification in an industry you might know little about. ETFs give traders a way to make smart plays in a sector, rather than trying to pick individual stocks and hoping to choose the right ones. Commodities and currencies: ETFs allow investing in commodities (such as oil, gold or agricultural products) and currencies (euro, yen, etc). These products required access to futures and forex trading before ETFs were created. Options: ETFs function just like a stock, because they represent a collection of individual stocks in a single sector. Accordingly, you can trade calls and puts on them to take advantage of movements in that particular sector. What are Exchange-traded notes (ETNs)? ETNs are structured products that are issued as debt securities by banks and are based on the performance of various assets, indexes and strategies. ETNs are not investments funds. When you buy an ETN, instead of putting your money into a fund that acutally buys and holds assets, you are buying debt from the ETN issuer — much like a bond investor would. Instead of being backed by the assets that are in the investment fund like ETFs are, ETNs are simply backed by the full faith and credit of the issuer. ETNs have maturity dates. When you hold an ETN until the maturity date, you receive a one-time payment based on the performance of the underlying asset, index or strategy. For instance, if you buy an ETN covering oil and the value of oil appreciates during the time you are holding the ETN, you will receive a higher payment at maturity than you will if the value of oil depreciates during the time you are holding the ETN. Of course, you do not have to hold an ETN until maturity if you don't want to. You can sell your ETN at any time on the open market.   What's wrong with mutual funds? Lack of transparency. High expense ratios and hidden fees. In a mutual fund, you're trapped because you can't leave the stock intraday. The NAV of the fund is calculated at the end of the business day, so you are stuck with that price and the implications of whatever movements occurred during the session. What are the risk considerations before investing in ETFs? Market risk: Since ETFs usually target one specific sector, investors can focus on one hot sector. However, this makes them prone to greater risk and market volatility. Tracking error: An ETF may not be able to exactly replicate the performance of the underlying index due to management fees, timing differences and other factors. Foreign exchange risk: Investors whose base currency is other than the currency denomination of the ETF will be subject to the risk of fluctuations in currency values. Risks Associated with Exchange-Traded Notes (ETNs) ETNs, just like any other investment, carry risk. However, ETNs carry the following two risks that ETFs don't: 1. Credit Risk: Credit risk is the risk that the institution that has issued the ETNs will default on the notes. Remember, ETNs are issued as unsecured debt securities — meaning there are not specified assets that serve as collateral for the ETNs. Instead, ETNs are only backed by the full faith and credit of the issuer. In good times, this isn't typically a problem. But during a financial crisis when banks and other large financial institutions — the main issuers of ETNs — are at risk of collapsing, it can be a big problem. 2. Call Risk: Call risk is the risk that the issuer of the ETN may call the ETNs back before maturity. If an issuer calls an ETN back, the issuer will compensate you for the ETN according to the call provision in the ETN, but you will lose the right to hold the ETN until maturity. Most popular ETFs, sorted by daily volume:  (*) click on the symbol to view a chart on Yahoo Finance: Fund Name (*) Ticker (*) Category Fund Family Volume(3 mo Avg)  SPDRs SPY Large Blend SPDR TRUST SERIES 1 464,318,000 PowerShares QQQ QQQQ Large Growth PowerShares QQQ Trust, Series 1 257,981,000 Financial Select Sector SPDR XLF Specialty-Financial Select Sector Spdr Trust 248,355,000 Ultra Financials ProShares UYG Specialty-Financial ProShares Trust 133,993,000 iShares MSCI Emerging Markets Index EEM Diversified Emerging Mkts iShares Trust 130,117,000 iShares Russell 2000 Index IWM Small Blend iShares Trust 119,126,000 Ultra S&P500 ProShares SSO Large Blend ProShares Trust 75,148,600 UltraShort S&P500 ProShares SDS Bear Market ProShares Trust 58,467,000 Energy Select Sector SPDR XLE Specialty-Natural Res Select Sector Spdr Trust 51,229,100 UltraShort QQQ ProShares QID Bear Market ProShares Trust 48,390,700 iShares FTSE/Xinhua China 25 Index FXI Pacific/Asia ex-Japan Stk iShares Trust 48,242,700 Ultra QQQ ProShares QLD Large Blend ProShares Trust 43,846,500 DIAMONDS Trust, Series 1 DIA Large Value DIAMONDS TRUST SERIES I 39,953,600 iShares MSCI Japan Index EWJ Japan Stock iShares, Inc. 37,235,400 iShares MSCI EAFE Index EFA Foreign Large Blend iShares Trust 33,924,300 UltraShort Financials ProShares SKF Bear Market ProShares Trust 29,917,300 iShares Dow Jones US Real Estate IYR Specialty-Real Estate iShares Trust 27,311,000 iShares MSCI Brazil Index EWZ Latin America Stock iShares, Inc. 24,989,300 UltraShort Oil & Gas ProShares DUG Bear Market ProShares Trust 21,408,200 iShares MSCI Taiwan Index EWT Pacific/Asia ex-Japan Stk iShares, Inc. 18,733,700 SPDR Gold Shares GLD Specialty-Precious Metals streetTRACKS Gold Trust 18,300,400 Ultra Dow30 ProShares DDM Large Blend ProShares Trust 16,452,000 Industrial Select Sector SPDR XLI Large Blend Select Sector Spdr Trust 15,273,700 Ultra Oil & Gas ProShares DIG Specialty-Natural Res ProShares Trust 15,207,100 UltraShort Dow30 ProShares DXD Bear Market ProShares Trust 14,847,000 Materials Select Sector SPDR XLB Specialty-Natural Res Select Sector Spdr Trust 14,790,800 Semiconductor HOLDRs SMH Specialty-Technology Merrill Lynch, Pierce, Fenner & Smith 14,456,700 Technology Select Sector SPDR XLK Specialty-Technology Select Sector Spdr Trust 13,822,300 United States Oil USO Specialty-Natural Res United States Oil Fund, LP 12,710,700 Oil Services HOLDRs OIH Specialty-Natural Res Merrill Lynch, Pierce, Fenner & Smith 11,921,900 MidCap SPDRs MDY Mid-Cap Blend MIDCAP SPDR TRUST SERIES 1 11,549,100 iShares Dow Jones US Financial Sector IYF Specialty-Financial iShares Trust 10,543,000 Vanguard Total Stock Market ETF VTI Large Blend Vanguard Index Funds 10,500,700 SPDR KBW Bank KBE Specialty-Financial Spdr Series Trust 10,427,500 iShares S&P 500 Index IVV Large Blend iShares Trust 10,018,100 UltraShort Russell2000 ProShares TWM Bear Market ProShares Trust 9,480,380 Utilities Select Sector SPDR XLU Specialty-Utilities Select Sector Spdr Trust 9,455,430 Consumer Discretionary SPDR XLY Large Blend Select Sector Spdr Trust 8,983,240 Retail HOLDRs RTH Large Blend Merrill Lynch, Pierce, Fenner & Smith 8,631,490 SPDR S&P Retail XRT Mid-Cap Growth Spdr Series Trust 8,395,960 UltraShort Real Estate ProShares SRS Bear Market ProShares Trust 8,071,950 SPDR S&P Homebuilders XHB Mid-Cap Blend Spdr Series Trust 7,296,880 Market Vectors Gold Miners ETF GDX Specialty-Precious Metals Market Vectors ETF Trust 7,293,970 iShares Silver Trust SLV Specialty-Precious Metals iShares Funds 7,287,590 Consumer Staples Select Sector SPDR XLP Large Blend Select Sector Spdr Trust 7,213,680 Health Care Select Sector SPDR XLV Specialty-Health Select Sector Spdr Trust 7,126,010 iShares MSCI Hong Kong Index EWH Pacific/Asia ex-Japan Stk iShares, Inc. 7,054,720 iShares Russell 1000 Growth Index IWF Large Growth iShares Trust 6,470,470 Ultra Russell2000 ProShares UWM Small Blend ProShares Trust 6,004,940 Ultra Basic Materials ProShares UYM Specialty-Natural Res ProShares Trust 5,880,180 iShares MSCI South Korea Index EWY Pacific/Asia ex-Japan Stk iShares, Inc. 5,861,920 SPDR KBW Regional Banking KRE Specialty-Financial Spdr Series Trust 5,610,040 iShares Russell 1000 Index IWB Large Blend iShares Trust 5,505,420 iShares Russell 1000 Value Index IWD Large Value iShares Trust 5,301,790 Vanguard Emerging Markets Stock ETF VWO Diversified Emerging Mkts Vanguard International Equity Index Fund 5,233,610 United States Natural Gas UNG Specialty-Natural Res United States Natural Gas Fund, LP 4,924,020 Ultra Real Estate ProShares URE Specialty-Real Estate ProShares Trust 4,721,780 iShares MSCI Mexico Investable Mkt Idx EWW Latin America Stock iShares, Inc. 4,202,420 UltraShort Basic Materials ProShares SMN Bear Market ProShares Trust 4,133,600 Vanguard REIT Index ETF VNQ Specialty-Real Estate Vanguard Specialized Funds 3,974,190 UltraShort MSCI Emerging Mrkts ProShares EEV Bear Market ProShares Trust 3,795,870 iShares S&P 100 Index OEF Large Blend iShares Trust 3,716,750 iShares MSCI Singapore Index EWS Pacific/Asia ex-Japan Stk iShares, Inc. 3,693,220 iShares MSCI Australia Index EWA Pacific/Asia ex-Japan Stk iShares, Inc. 3,407,150 iShares Russell 2000 Growth Index IWO Small Growth iShares Trust 3,317,750 iShares S&P 500 Growth Index IVW Large Growth iShares Trust 3,296,030 iShares S&P Latin America 40 Index ILF Latin America Stock iShares Trust 3,270,650 iShares Russell 2000 Value Index IWN Small Value iShares Trust 3,204,540 UltraShort FTSE/Xinhua China 25 Proshare FXP Bear Market ProShares Trust 3,178,210 iShares S&P SmallCap 600 Index IJR Small Blend iShares Trust 3,089,650 Regional Bank HOLDRs RKH Specialty-Financial Merrill Lynch, Pierce, Fenner & Smith 2,989,250 iShares Russell Midcap Index IWR Mid-Cap Blend iShares Trust 2,810,560 All symbols listed above (cut & paste to your watch list): SPY QQQQ XLF UYG EEM IWM SSO SDS XLE QID FXI QLD DIA EWJ EFA SKF IYR EWZ DUG EWT GLD DDM XLI DIG DXD XLB SMH XLK USO OIH MDY IYF VTI KBE IVV TWM XLU XLY RTH XRT SRS XHB GDX SLV XLP XLV EWH IWF UWM UYM EWY KRE IWB IWD VWO UNG URE EWW SMN VNQ EEV OEF EWS EWA IWO IVW ILF IWN FXP IJR RKH IWR Read more on different types of ETFs:  Bear Market ETFs  Currency ETFs  Sector ETFs Commodity ETFs International ETFs Leveraged ETFs Bull - Bear Pairs Index ETFs Bond ETFs High-Yield ETFs