What is ETF?
Exchange Traded Fund or ETF is a form of an investment originating from the stock market. A number of stock exchanges around the globe permit the trading of ETF as shares. ETF is actually an investment plan similar to stocks. The Standard and Poor 500 index in the stock market is a standard element in which ETF works to duplicate such standard stock market element. Moreover, ETF may also attempt to replicate a particular market. Such particular market may be automotive market or technology market. Alternatively, may also attempt to represent itself subsequent to a definite commodity such as silver or oil.
Different stock exchanges located in the different parts of the world have different ways of working out ETF. However, ETF maintains some universal elements which remain common to all stock markets in the world. Such universal elements are as follows:
- ETF must maintain a listing on the stock exchange market and must be traded on constant basis.
- ETF is identified on how its value is assigned.
- ETF value must exactly be related to the assets values it encompasses.
Investors find ETF as a more advantageous form of investment than other conventional investments that are open-ended. ETF is known to work out on a structure that is diversified. Moreover, initial funding can be minimal and as well as its turnover. In addition, ETF shares are sold without restraint in the open market. On the other hand, only investors with large fund generally purchase ETF. Shares of Exchange Traded Fund are normally held by investors in a long term basis prior to cashing them for turnover. However, assertive hedge funds utilize ETF in augmenting their value.
As for the history of ETF, it can be traced back in the year 1989. A proxy of S&P 500 (Index Participation Shares) traded on the AMEX or American Stock Exchange and Philadelphia Stock Exchange. In spite of this, the product was transitory as the lawsuit filed by the Chicago Mercantile exchanged successfully brought to end the selling in the US.
However, in the year 1990, Toronto Stock Exchange started to allow the trading of a similar product, which is known as the Toronto Index Participation Shares. The shares have been very popular which led the AMEX to formulate something that will be able to be suitable for the Securities and Exchange regulations of the US.
ETF have various advantages why it is being considered by numerous investors. Aside from its lower cost, the buying and selling is also flexible since the ETFs can be bought throughout the day at anytime. When it comes to taxation, ETFs are considered to be efficient. Moreover, transparency in portfolios is one of the reasons why investors choose investing in the fund.
New investors interested in Exchange Traded Fund must not hastily decide in putting their money with the fund. Still, it is important to evaluate if it is the right investment in relation to their financial profile. Consulting the expert opinion of financial advisers must be considered. On the other hand, if one would decide to invest in ETF, it is important to pick some of the most popular ETFs as they are trusted and considered stable funds.