Also found in:DictionaryThesaurusMedicalAcronymsEncyclopediaWikipedia.Similar to an index mutual fund, these tracking stocks trade continuously. Two popular ETFs are the Standard and Poors depositary receipt (SPDR) launched in 1993 and the NASDAQ-100 Index Tracking Stock (QQQ) which was launched in 1999. These vehicles are popular for hedging as well as investment.Asecuritythat represents all thestockson a given exchange. For example, anexchange-traded fundmay track theStandard and Poors 500. The organization issuing the exchange-trade fund owns each of thestockstraded on the S&P 500 in approximate ratio to theirmarket capitalization. ETFsharescan beboughtsoldshort-soldtraded on margin, and generally function as if they were vestorsuse exchange-traded funds as a way to easily diversify their portfolios at relatively lowcost. See also:SPDR.
Exchange traded funds (ETFs) resemble open-ended mutual funds but are listed on a stock exchange and trade like stock through a brokerage account.
You buy shares of the fund, which in turn owns a portfolio of stocks, bonds, commodities, or other investment products. You can use traditional stock trading techniques, such as buying long, selling short, and using stop orders, limit orders, and margin purchases.
The ETF doesnt redeem shares you wish to sell, as a mutual fund does. Rather, you sell in the secondary market at a price set by supply and demand. ETF prices change throughout the trading day rather than being set at the end of the trading day, as open-end mutual fund prices are.
Each ETF has a net asset value (NAV), which is determined by the total market capitalization of the securities or other products in the portfolio, plus dividends but minus expenses, divided by the number of shares issued by the fund.
The market price and the NAV are rarely the same, but the differences are typically small for the most widely traded conventional ETFs. Thats due to a unique process that allows institutional investors to buy or redeem large blocks of shares at the NAV with in-kind baskets of the funds securities or other products.
Most ETFs are linked to a market index, which determines the funds portfolio. While the majority of the indexes are traditional, some are described as fundamental. In those indexes, components of the index are identified on the basis of selective criteria, such as their performance, rather than their market capitalization.
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