What are ETFs

You may have heard of ETFs. What exactly are they?

Introduction
Exchange-Traded Funds, or ETFs, are similar to mutual funds that trade on stock exchanges, with a few important differences. They have many of the advantages of stocks while removing some of the downsides that mutual funds have.

Purpose of ETFs
Have you ever wanted to trade shares of an index like the Dow Jones Industrial Average? You can't trade that but you can do it with ETFs. Those who supervise ETFs usually invest in the same stocks or futures that comprise the index or commodity in an effort to make the ETF's value per share track a certain index or commodity up and down. This allows traders with access to stock trading the ability to easily trade indexes or commodities indirectly.

Example: SPY - SPDR Trust Series I:
One of the most well known ETFs is SPY, who's 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 a small percent most of the time.

Example: QQQQ - PowerShares QQQ Trust, Series 1:
The purpose of this fund is to track the Nasdaq-100 index by issuing and redeeming shares of the stocks that make up the index.

Example: EEM - iShares MSCI Emerging Markets Index Fund:
This ETF looks to track the price and performance of the MSCI Emerging Markets index, which tracks performance of international stocks. This fund is actually non-diversified. This means it is has more risk built in as other funds as it targets a specific sector.

Example: USO - United States Oil Fund LP:
This commodity ETF follows the price of oil prices, West Texas Intermediate light, sweet crude oil. There strategy is to constantly trading futures contracts for oil, natural gas, and several other things. It is also non-diversified but a very convenient way to invest in oil price movement.

Benefits of ETFs
The advantage of ETFs include diversity, the same tradability as stocks, low costs, tax efficiency, and transparency of assets.

What are ETFs
ETFs 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
You can learn more about ETFs at 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.

For more information on the stock market please visit: http://www.HowTheMarketWorks.com/

Nicholas Swezey is the creator of the Free day trading game at http://HowTheMarketWorks.com. He is a monthly published analyst on issues related to day trading. His site has grown expenentially}} over the last year doubling the number of visitors monthly with around 600 new members daily.