Exchange Traded Funds, ETF, have become immensely popular since they were first introduced in 1993. Their popularity skyrocketed with subsequent evolution of internet, which allowed institutional trader and individual investor to trade ETF. Now, almost every major financial website and stock charting service has built-in filters for an ETF recommendation.
Why should you trade ETF?
Actually, these Exchange Traded Funds hold assets, such as stocks, and trade at the same price as the net asset value of underlying financial security. For example, ETF of S&P 500 index can be traded just like someone is trading the index, itself. Since, it is almost impossible for an individual to trade such popular indexes like S&P 500 and Dow therefore ETF allow investors to buy and sell their positions just as they would do while trading these Indices. Moreover, stop losses and limit orders can also be conveniently initiated.
Types of ETF
ETF can be of many types. Index ETF is most common which allow investors to trade the performance of an entire Index. As of February 2008, United States financial market had more than 415 Index ETF. Apart from this type, Bond ETF, Commodity ETF and Currency ETF are also in demand. By volume two of the largest ETF are QQQQ and SPY. SPY tracks the performance of S&P 500 while QQQQ follows NASDAQ 100 stocks.
Besides, there are other kinds of large volume ETF. Among the most popular is Vanguard Total Stock Market, VTI, which has more than $130 Billion in net assets. As its name implies, it is a part of Vanguard family of ETF. VTI is designed to track investment return of some 1,200 to 1,300 US stocks. Since March 2009, this ETF has gained over 100% in returns. There are other categories of ETF, as well. These include Bear Market, Europe Stock, Foreign Large Blend, Specialty Stocks and Small Growth etc. In fact, there are so many types that it sometimes gets difficult to select one.
Benefits
It should be noted that the popularity of ETF is primarily due to its characteristics of deriving its value from a number of instruments. Such diversity safeguards traders against sudden large fluctuations, which they usually experience while trading stocks. ETF also allow traders to speculate on the movement of entire Index rather than on multiple financial securities. Other benefits such as low cost, flexibility of trading large Index and tax relief make Exchange Traded Funds, an extremely lucrative option. Nevertheless, these ETF are a potential learning library for beginners as it allows them to learn the ropes of financial markets without putting their financial assets, at risk. For more information take a look at this ETF Newsletter.
