Purpose of Them Have you ever wanted to trade shares of an index like the Dow Jones Industrial Average or the S&P 500? Well, you can't do that directly but you can do it indirectly through ETFs. The managers who run them usually invest in the same stocks or futures that make up an index or commodity in an effort to make the fund's value per share track a certain index or commodity up and down. This allows anyone with access to stock trading the ability to easily trade indexes or commodities indirectly.
Example: SPY - SPDR Trust Series I: One of the most popular ETFs, its goal is to track the price and performance of the S&P 500 index. It will not be the same price as the index but its chart should have the same shape as the index, within one or two percent most of the time.
Example: QQQQ - PowerShares QQQ Trust, Series 1: The goal of this fund is to track the Nasdaq-100 index by issuing and redeeming shares of all the stocks that make up the index.
Example: EEM - iShares MSCI Emerging Markets Index Fund: This fund seeks to track the price and performance of the MSCI Emerging Markets index, which tracks performance of international stocks. This fund is actually non-diversified, which means it is not as safe as other funds because it is focused on a specific sector.
Example: USO - United States Oil Fund LP: This commodity ETF attempts to track the price and performance of oil prices, West Texas Intermediate light, sweet crude oil, to be exact. This is accomplished by continually trading futures contracts for oil, natural gas, and several other things. It is also non-diversified but a very convenient way to make trades based on oil prices.
Benefits of Them The main benefits of ETFs include diversity, the same tradability as stocks, low costs, tax efficiency, and transparency of assets.
What are They Exchange-Traded Funds are somewhat complicated to explain, but they are funds that can be structured in a few different ways. They are usually passively managed, which means the managers do not have to constantly decide which investments need to be bought and sold in order to increase the value of the fund. Instead, the managers simply have to make sure the fund tracks a certain index or commodity as closely as possible, which can be as simple as owning the stocks that make up an index and adjust the shares accordingly so that the price follows the index's chart.
Where to Find Them Many financial websites, including brokerages, offer a free stock screener, along with an ETF screener. Yahoo! Finance has a good one that lets you view a list of the best performers in several different categories. by Nicholas Swezey
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