ETFs are open-ended funds that can be bought and sold as quickly and easily as ordinary shares on a stock exchange – they have become popular and widely used investment vehicles to achieve many investment strategies:
- to gain diversified exposure to a market
- for core/satellite investing
- for buy and hold investing
- for active traders who wish to take advantage of market movements
- for investors wishing to hedge the market
- as an alternative to futures and other institutional investment tools
Structure of ETFs
ETFs combine features of both stocks and index funds. Like stocks, ETFs can be bought and sold on an exchange during trading hours, through any broker and on most trading platforms. And like index funds, ETFs contain baskets of securities designed to track specific indices. Some indices are narrow, tracking a single market sector with only a dozen or so holdings, while others as broad as the entire market with thousands of holdings.
This means you can use ETFs to gain the exposure and diversification you want, while still applying the trading strategies you're used to – placing limit orders; short selling; and on some ETFs, trading options.
Comparison of Investments
| Stock | ETF | Traditional Mutual Fund | |
|---|---|---|---|
| Diversification of Investment | Low - Individual securities | High - Basket of securities | Depends on different funds - Basket of securities |
| Pricing | Continuous intra-day pricing | Continuous intra-day pricing | Daily quote after market close |
| Liquidity | Varies | Comparatively higher | Limited liquidity |
| Transparency | Varies | Comparatively higher | Low transparency |
| Fee | Varies | Comparatively lower | Varies |
| Short-selling | Yes | Yes | No |
| Limit order | Yes | Yes | No |
