Basics Of Etf Trading

ETFs, or exchange-traded funds, were first introduced to the market in the early 1990’s and are used as an investment vehicle, traded similar to stocks or shares on stock exchanges. These funds are often attractive to investors because of their tax efficiency, low costs and similarity to stocks. ETFs have been called the most innovative investment medium of the last twenty years by 67% of investment professionals in March 2008. Of these professionals, 60% reported that ETFs have significantly changed how they build investment portfolios. Perhaps the most widely known ETF is called the Spider (SPDR) and tracks the S&P 500 index, trading under the SPY symbol.

ETFs experience price changes during the course of a trading day as they are bought and sold, but tend to trade at the same price as the net asset value of its underlying assets along the period of a trading day, and holds assets such as bonds or stocks. Most ETFs track / monitor a financial index, for example the Dow Jones Industrial Average.

Exchange-traded funds maintain all the features of ordinary stock – for example short selling, options and limit orders – but provide easy diversification, tax efficiency of index funds and low expense ratios. Unlike mutual funds, it does not have its net asset value (NAV) calculated every day. Some investors tend to invest in ETF shares as long-term investments because the can be economically acquired, held and disposed of, while other investors prefer to trade ETF shares regularly in order to employ market timing investment strategies.

Some criticism has been given of ETFs. A leading issuer of index funds, The Vanguard Group, has argued that ETFs don’t provide enough diversifications, that trading expenses decrease the potential return for investors. ETFs that tracked domestic indexes generally experience less than 2% variation on closing price, but variations may be much greater when ETFs track foreign indexes. This is why monitoring of commodities is so important.

In late 2008 it was reported that a few lightly traded ETFs had frequent deviations of more than 5%, and in a select number of cases greater than 10%, though the typical deviation is not much more than 1%. The largest deviations in trade occur just after the opening of market. Several critics have claimed that ETFs have been used to manipulate market prices and been used in short selling, which according to some contributed to the 2008 market collapse.