Exchange Traded Funds (ETFs)

Exchange Traded Funds (ETFs) are mutual funds that trade like stocks. Each ETF has its own ticker symbol and expense ratio (assets that are used pay for operating expenses). They are very easy to trade and understand.

ETFs have transformed from a way to investment in the major indexes into a wide range of other financial markets and sectors. Today, ETFs give you a variety of different markets and commodities to trade without the hassle of opening up separate brokerage accounts. Because ETFs are traded like stock, they can be purchased through almost all of your brokerage accounts. ETF's can even be traded in most 401K, IRAs, and other retirement accounts.

For example, let's say you wanted to invest in Crude Oil (light, sweet crude oil). Crude Oil is traded on NYMEX. If you did not have access to NYMEX through your current account, you would have to open up a separate brokerage account to get access to this commodity.

Now, with ETFs, all you would have to do is invest in ticket symbol: CUSIP. "This ETF will track the price of West Texas Intermediate (WTI) light, sweet crude oil delivered to Cushing, Oklahoma, whose price is the primary benchmark in the U.S. for crude oil."

It is a much easier transaction to buy the ETF because it trades like a stock. Like stocks, though, ETFs trade throughout the day and are priced by the market, not necessarily at their net asset value (unlike mutual funds that only trade at their settled net asset value at the end of the trading day). To your broker, trading an ETF is the same as trading a stock. The fee you pay to buy or sell an ETF is the same fee you would pay to trade a stock.

You also don't have to worry about calculating how many, "contracts" to buy or contract expiration dates as you would with a separate futures account. The EFT takes care of all of this for you.

Although ETFs trade differently than your traditional mutual funds, your decision to buy, hold or sell remains the same.

The decision to use ETFs is up to you. They are ideal for day trading, swing trading and long term, "buy and hold" investments. Because ETFs trade like stocks, they minimize trading restrictions often imposed by your mutual funds. For example, on some Fidelity Mutual Funds, you would face a short term holding fee of $75.00 if you traded your mutual fund without holding it for approximately 90 days (Check with your fund company to confirm their policy.). If you were attempting to day trade or swing trade this mutual fund, you would have to pay $75 dollars every time you violated this holding period. If you were to purchase an ETF instead, you would only have to pay your brokerage fees for a stock transaction.

ETFs have grown in popularity and have been accepted by the professional and novice investor as a valid investment choice. They have allowed many people to invest in markets that were not easily available. The only choice for you now is to research the wide range of ETF's available to you and see which ones fit into your overall investment portfolio.

Michael MeAngelo writes a BLOG on Online Trading at http://www.onlinetradingday.com