April 6, 2007, Newsletter Issue #61: Exchange Traded Funds (ETFs)

Tip of the Week

Exchange Trade Funds (ETFs): ETFs are investments that contain a pool of securities representing a specific index such as the Dow Jones Industrial Average or the S&P 500. Essentially, ETFs are built like mutual funds but trade like stocks. They are priced continually and can be bought or sold throughout the trading day. ETFs are attractive to individual and institutional investors alike because they provide liquid, cost-efficient exposure to a broad range of asset classes. They can be shorted or purchased on margin and many of them are even optionable, such as the Nasdaq-100 Trust (QQQ).

An area that has gained popularity in recent years is trading securities that track the performance of a sector or a basket of stocks. Generally known as Exchange Traded Funds (ETF), this group allows market participants to trade one security that gives them exposure to a number of stocks. There are several types of ETFs, provided by different companies. The most common types are the trust products such as the Nasdaq-100 Trust (QQQ), the HOLDRs and the iShares. A good source of general information on the various ETFs, is the Nasdaq´s site. Each of the different products has slightly different rules on how they can be traded so make sure you read up on them before trading.

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