Exchange Traded Funds

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> >	ETF Basics ETF Differences

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ETFs are hybrid investment vehicles that are part individual security and part mutual fund.

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ETF - Page 2

IS IT A STOCK? IS IT A MUTUAL FUND? NO, IT'S AN ETF!
ETFs are hybrid investment vehicles that are part individual security and part mutual fund. With an ETF, you buy and sell shares in the collective performance of an entire portfolio of securities — sometimes described as a basket of securities — in the same way you buy and sell shares of a single stock.

Because of their growing popularity, you can find ETFs for nearly every published index, no matter how narrow a segment of the market it may track. In the United States, in most cases, there's only one ETF tracking each index — the exception is that both the SPDR and the iShares S&P 500 Index Fund hold all the stocks in the S&P 500. That helps to avoid potential liquidity problems, which may occur with multiple ETFs tracking the same index.

	Exchange traded funds	Index funds
Real-time quotes	Yes	No
Intraday trading	Yes	No
Commissions or sales charges	Yes	Sometimes
Shareholder services	No	Yes
End of day NAV = Trading price	No	Yes
Sales charges to reinvest earnings	Yes	Sometimes
Buy on margin or sell short	Yes	No

ASSESSING THE DIFFERENCES
Apart from its distinctive brand name and stock symbol, what distinguishes one ETF from another?

One difference is the fees, which are listed in the ETF prospectus as the fund's expense ratio, or percentage of the assets invested. For example, if an expense ratio is 0.8% and you've invested $10,000, only $80 is deducted from your dividends annually to cover your share of the cost of managing the ETF. The ETFs with the lowest fees tend to be the ones that invest in the most sought after, broadest-based indexes, a characteristic they share with index mutual funds.

Generally, you also pay a brokerage commission to buy or sell shares of an ETF. That cost varies, depending on the firm where you have an account, and can add up if you trade frequently or use a dollar cost averaging investment strategy that requires regular purchases. So you may want to consider cost carefully in in choosing between an ETF and a no-load index mutual fund and in choosing the firm through which you trade.

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Disclaimer: This information is provided with the understanding that the authors and publishers are not engaged in rendering financial, accounting or legal advice, and they assume no legal responsibility for the completeness or accuracy of the contents. Some charts and graphs have been edited for illustrative purposes. The text is based on information available at time of publication. Readers should consult a financial professional about their own situation before acting on any information.