What Are Index-Linked Exchange-Traded Funds?|
Index-linked exchange-traded funds (ETFs) are baskets of stocks that trade on major US exchanges.
Each share represents a portfolio of stocks which track a specific index or group of stocks. Because
they trade on the exchange, an investor same strategies used with any other stock investments, including
market and limit orders, buying on margin, and short selling.
Because they are passively managed (that is few changes are made to the underlying portfolios) this
helps to reduce investor taxes, operating costs of the basket, and volatility.
Index linked ETFs only change when the index does, so portfolio changes are infrequent. In comparing
these to an actively managed mutual fund, turnover can trigger capital gains and transaction costs, which
in turn, are passed to the individual investor. Lower turnover results in lower forced realized gain to
the investor, and in turn effective tax management by the investor. Because they are not actively managed,
the index-linked ETF's tend to have lower operating costs and expense fees than actively managed funds.
ETFs are very effective when used to asset allocate a portfolio. With ease, an investor can diversify
over Large, Mid and Small-Cap stocks by purchasing the ETF, whereas to purchase individual securities, or pick the
'right' stocks, could prove cost prohibitive. Sector and country ETF's are also available, so an investor
may choose to employ sector weighting or country strategies.
As previously mentioned, stop and limit orders can be used, unlike index mutual funds. Additionally, options
are available on certain ETF's, which allows the investor to also hedge positions.
A comprehensive list of ETFs follows: