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Why Invest in Exchange Traded Funds ETFs

By: Keith Timmini
For : Economy Watch
Date Added : April 25, 2010 Views : 435
Rate Author : Current : 2.55 /5
Rate this PR : Current : 2.74 /5



An Exchange Traded Fund (ETF) provides investment opportunities similar to trading stocks on the stock exchange. ETF’s hold assets and trade at about the same price as the underlying assets that make up the fund throughout the trading day. But one of the main attractions to ETF’s as investment instruments are their relatively low costs, tax efficiency, and ease in trading as they are so similar to trading stocks.


Most typically, large investors purchase or sell shares of an ETF directly to or from the funds’ manager in increments know as creation units. Creation units comprise blocks of tens of thousands of ETF shares and are typically alike in-kind. The ability to purchase and redeem these creation units provides ETFs an arbitrage mechanism in which to minimize the potential deviations between market pricing and the net asset value of the particular ETF shares.


An ETF combines features of a mutual fund or investment trust with that of a closed-end fund and can be bought or sold at the end of each trading day for its net asset value or traded throughout the trading day at prices that may be more or even less than Is net asset value making it a flexible investment tool for many divergent and varying investment styles.


When there is strong demand from investors for an ETF, its share price will rise above its net asset value per share motivating arbitrageurs to purchase additional creation units from the ETF to sell component ETF shares on the open investment market. The additional supply of shares increases the ETFs market capitalization and thereby reduces the market price per share.


ETFs have been available in US markets since 1993 and in Europe since 1999. Throughout most of that time, Exchange Traded Funds were for the most part index funds, but in 2008 the US Securities and Exchange Commission began authorizing the creation of actively managed ETFs. Since then, ETFs have flourished in popularity and form a significant portion of trading activity on US Exchanges.

Why Invest in Exchange Traded Funds (ETFs), learn all about it here

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Why Invest in Exchange Traded Funds


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