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Blue Vase Capital Management Index Exchange Traded Funds (ETF's) combine characteristics of an open-ended mutual fund and stock. Like index mutual funds, index ETF's represent a small ownership in a portfolio of securities that track a specific market index. For example, the SPDR (Standard and Poor's Depository Receipt or "Spider") index exchange traded fund offered by the American Stock Exchange contains the same stocks as the S&P 500 index, and is designed to track that index.
Unlike mutual funds, which are restricted to trading once-a-day at the end of the day, ETF's are bought and sold intraday. Thus, the price of an index exchange traded fund changes throughout the day. The price fluctuations occur due to changes in the underlying index, as well as changes in the supply and demand for the ETF itself.
Exchange traded funds have some other unique characteristics. Because they are not "actively managed" like most mutual funds, the internal costs are generally lower than many mutual funds. ETF's provide broad diversification across many different market segments. ETF's are also tax efficient because they generally do not generate the same volume of tax events as other types of investments.
There are risks involved with investing, including possible loss of principal. Diversification may not protect against market risk. An investment in the funds are not insured or guaranteed by the FDIC or any other government agency. Mutual funds and ETF's are obligated to distribute portfolio gains to shareholders by year-end. These gains may be generated due to index rebalancing. Certain mutual funds may be tax efficient as well.
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