ETF Trade

By: EconomyWatch   Date: 3 August 2009

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ETF trade offers the benefits of both the mutual funds and the stocks. ETF trading has emerged as the preferred investment for a large number of traders. With its simplicity of trading and diversification of mutual funds, ETF has enabled many traders to reap the benefits of the emerging market and the world economy as a whole.

 

ETFs are primarily a bouquet of holdings that vary based on the companies that make them. They may track a specific sector or can have a broader global coverage. They try to replicate the performance of the indices that they track. They are evaluated by their demand just like stocks. They can also be bought or sold at prices higher or lower than their holdings or NAV (Net Asset Value).

 

ETF trade is stringently regulated by the different regulatory bodies around the globe such as:

  • the SEC

  • the U.S. Securities and Exchange Commission of USA.

 

ETF Trade and Mutual Funds

 

Owning an ETF is similar to owing a mutual fund. However, the former has many advantages such as:

  • ETF trade offers various styles of trading. One can invest in inverse ETFs, ultra ETFs, sector ETFs, fixed income ETFs, and high yield ETFs. The huge variety in the types of ETFs clearly offers an edge over mutual funds which lack such options. Different styles enable investors of varying capacity to invest and make comparable profits.

  • One can hold short positions in ETF trade, a feature that is missing in mutual funds.

  • ETF trade has lesser expense ratio and no active management fee.

  • A trader can make profits even in a falling market with short ETFs whereas mutual funds incur losses in such situations.

 

ETF Trade Growth
 

With its beginning in 1993, ETF trade has proliferated to a collection of over 600 ETFs. In fact, ‘Financial Research Corporation’ projects that ETFs will grow at over 20% per year and their total asset value will be $1.5 trillion by 2012.

 

However, not all ETFs are profitable. Though, they offer the transparency of mutual funds, still due to the volatility of their stocks, they can cause huge losses. Therefore, investors must study ETFs’ portfolio before investing in them.

 

 


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