Exchange Traded Funds (ETFs)

Exchange-Traded Funds, or ETFs, are basically index funds that trade just like stocks on major stock exchanges. Want to invest in the market quickly and cheaply? ETFs are the most practical vehicle. They help the investor focus on what is most important, choice of asset classes.

All the major stock indexes have ETFs based on them, including:

• Dow Jones Industrial Average
• Standard & Poor's 500 Index
• Nasdaq Composite

There are ETFs for large US companies, small ones, real estate investment trusts, international stocks, bonds, commodities, emerging markets, regions as well as a host of other sectors. Pick an asset class that is publicly available and there is a good bet that it is represented by an ETF or will be soon.

ETFs differ fundamentally from traditional managed funds, which do not trade midday. Traditional managed funds take orders during Wall Street trading hours, but the transactions actually occur at the close of the market. The price they receive is the sum of the closing day prices of all the stocks contained in the fund. Not so for ETFs, which trade instantaneously all day long and allow an investor to lock in a price for the underlying stocks immediately.

ETFs are economical to buy and especially to maintain over the long-run, making them especially attractive for the typical buy-and-hold investor. Although investors must pay a brokerage transaction to purchase them, this becomes negligible compared to annual fees attached to a comparable managed fund. ETFs can be margined, and options based on them allow for various defensive (or speculative) investing strategies.

Their safety as a securities instrument (considered separately from the safety of any particular asset class they might represent) is considered the same as stocks themselves. Internally, ETFs are far more complex entities than managed funds. Legally, ETFs are a class of managed fund as they fall under many of the same Securities Exchange Commission (SEC)

Popular ETFs

Standard & Poor's 500 Index Depository Receipts (SPY:AMEX)

The first and still the biggest ETF, this inexpensive fund (pronounced Spiders) tracks the S & P 500 index, which is widely regarded as the standard for measuring large-capitalization U.S. stock market performance. Some selectivity by Standard & Poor's surrounds an otherwise methodical list of the 500 largest traded firms.

Nasdaq-100 Index Tracking Stock (QQQ:AMEX)

Tracks the Nasdaq-100 index, which includes 100 of the largest companies listed on The Nasdaq Stock Market based on market capitalization. It is widely perceived as a technology benchmark and includes computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain financial companies or investment companies.

DIAMONDS Trust (DIA:AMEX)

This popular ETF Tracks the Dow Jones Industrial Average, a benchmark of 30 blue chip stocks selected by The Wall Street Journal. The index is highly subjective and rather antiquated in its formula but serves as a good barometer for very large old-line US companies.

iShares S & P 500 (IVV:AMEX)

Barclays' slightly less expensive version of the SPDR tracks the S&P 500 index, which is widely regarded as the standard for measuring large-capitalization U.S. stock market performance. Some selectivity by Standard & Poor's surrounds an otherwise methodical list of the 500 largest traded firms.

Standard & Poor's MidCap 400 SPDRs (MDY:AMEX)

Tracks the S & P MidCap 400 index, which measures the performance of the mid-size company segment of the U.S. market and complements the S&P 500 seamlessly.

iShares Russell 2000 (IWM:AMEX)

Tracks the Russell 2000 index, a popular benchmark for mid- and small-cap companies. The Russell 2000 Index represents the second tier of U.S. equities, or companies with market values between $20 million and $300 million, which account for approximately 8 to 9 percent of the total market. Russell's methodology leads to relatively high turnover.

iShares MSCI EAFE (EFA:AMEX)

The iShares MSCI EAFE Index Fund tracks the MSCI EAFE Index, the top non-US large capitalization index that includes all major economies (except US) and no emerging markets. A popular way to gain foreign exposure.

iShares SmallCap 600 (IJR:AMEX)

Tracks the S & P SmallCap 600 index, which measures the performance of the small-capitalization US companies.

Consumer Services Select Sector SPDR (XLV:AMEX)

One of the many sector ETFs from S & P, which tracks consumer services companies selected from the S&P 500 index.