Exchange-Traded Funds (ETFs)

• ETFs are exchange-traded funds, much like a mutual fund that trades like a stock. Unlike a mutual fund, which has its net-asset value calculated at the end of each trading day, an ETF's price changes throughout the day, fluctuating with supply and demand.
• ETFs are passively managed, meaning investors save big on management fees. But it is important to remember that although ETFs attempt to replicate the return on indexes, there is no guarantee that they will do so exactly; it is not uncommon to see a 1% or more difference between the actual index’s year-end return and that of an ETF.
• ETFs simplify index and sector investing in an approach that is easy to understand. They are relatively low cost, with expense ratios that are lower than that of an average mutual fund. When you trade an ETF, you pay your broker the same commission you pay on any regular trade.
• ETFs offer good diversification. They represent a basket of stocks that reflect an index, such as the S&P 500. Today, there are literally hundreds of ETFs on the open market, tracking a wide variety of sector-specific, country-specific and broad-market indexes.
• ETFs are flexible. By owning one, you get the diversification of an index fund and the flexibility of a stock. You can short sell them, buy them on margin and purchase as little as one share.

Popular ETFs

Nasdaq-100 Index Tracking Stock (QQQQ)
This ETF represents the Nasdaq-100 Index, which consists of the 100 largest and most actively traded non-financial stocks on the Nasdaq. QQQQ offers broad exposure to the tech sector. Because it curbs the risk that comes with investing in individual stocks, the QQQQ is a great way to invest in the long-term prospects of the technology industry. The diversification it offers can be a huge advantage when there is volatility in the markets. If a tech company falls short of projected earnings, it will likely be hit hard. Between 2000 and 2004, QQQQ was by far the most heavily traded index fund. 

SPDRS
Usually referred to as spiders, these investment instruments bundle the benchmark S&P 500 and give 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; there are literally dozens of these types of ETFs. The “technology select sector index,” for example, contains more than 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 (Barclay’s Global Investors “BGI”) brand of ETFs. In 2004, there were approximately 120 iShares trading on more than 10 different stock exchanges. Barclay has put out a number of technology-oriented iShares that follow Goldman Sachs’ technology indexes. All of these particular ETFs trade on the AMEX. 

VIPERS
VIPERs are Vanguard’s brand of this useful financial instrument. Vipers, or Vanguard Index Participation Receipts, are structured as share classes of open-end funds. Vanguard also offers dozens upon dozens of ETFs for many different areas of the market including the financial, healthcare, and utilities sectors.

DIAMONDS
These ETF shares, Diamonds Trust Series 1, 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 AMEX.

Helpful ETF Links:

Exchangetradedfunds.com

iShares

American Stock Exchange

NYSE

PowerShares.com

ProShares.com

Rydex ETFs

SPDRs

Vanguard

Wisdom Tree

Morningstar