What does an ETF do?An ETF’s job is to equal an exact market index and ensuring a fund management style referred called passive management, the main distinguishing feature of ETFs which offers numerous benefits for those investing in index funds. With passive management, a fund manager keeps the funds in line with its index by making slight modifications every so often—a far cry from the actively managed fund, where the manager constantly trades assets in order to surpass the market. Investors and market watchers alike first noticed this trend involving market indexes—where they regularly exceeded actively managed portfolio funds—during the late 1970s. Essentially, based on these facts, market indexes are better investments compared to managed funds, and long-term investments strategy are ideal, in order to garner the benefits of index growth. ETFs combine the minimalism of trading a single stock with the diversity of a broad portfolio. As a result, investors are able to purchase short sell shares, shares on margin, and with the idea of investing in the long term. However, because the worth is based on a principal index, ETFs have the added benefits of larger expansion than shares found in lone companies, along with what most investors believe to be the flexibility that accompanies investing in asset types, regions, sectors, as well as whole markets.

What makes ETFs unique?

Although ETFs are traded on an exchange like stocks, the process that creates shares is considerably different. Unless a company decides to issue extra shares, the supply of an individual stock’s shares being traded on the market is exact. However, if demand increases for ETF shares, authorized participants can immediately create supplementary shares. Additionally, expense ratios for ETFs are typically lesser than a mutual fund. When ETFs are brought and sold, the same commission paid on a regular order is paid to a broker.

Why should I use ETFs?

One reason to use ETFs is due to their high level of efficiency, the same reason they have become the preferred method for multiple investment strategies. Lower executive costs—alongside lower capital gain taxes—place a larger portion of one’s investment dollar to work within the stock market. TradeKing is one good option for helping you get started with ETF’s, if you are interested be sure to check them out here. Also be sure to check out my TradeKing review for more information on using TradeKing.

So how many of you could honestly say you knew does ETF stand for before reading this?