Exchange traded funds (ETF's) are like mutual funds with a very important difference: investors buy and sell ETF shares in the stock market during the trading day. This means that the price of the shares changes throughout the day based on investor demand for shares of the ETF. Comparatively, mutual funds are typically priced at the end of each trading day.
The range of different ETF's and the different investment strategies, methods, mandates, and other specifics is simply staggering. These different types of funds carry different investment risks, so it is important for investors to understand the specific fund structures underlying ETF investments. This range of investment opportunities by exchange-traded funds can be used to carry out an asset allocation strategy or provide a measure of diversification for investment portfolios.
Special ETF funds called inverse ETF funds are structured to provide investors with an alternative to shorting stock, for example, by investing in the opposite direction as mutual funds. So an inverse silver fund might, for example, go up in price when the price of silver is going down. If the price of silver is going down then an investor may find an inverse ETF such as ProShares UltraShort Silver (ZSL) to be appealing.
With mutual funds, investors purchase shares in the fund, and the fund in turn invests the shareholder money into stocks, commodities, bonds, or whatever investments the fund specializes in. With ETFs however, the money paid for shares is exchanged among investors who are buying and selling the shares.
In addition to ETF's there is another type of investment called the exchange-traded note or ETN. As the name suggests, these are debt notes and in most cases are treated differently than ETF's for tax purposes.
ETF Investing Advantage
One important advantage of ETFs over mutual funds is that they are not subject to liquidation risk such as that which occurs when a mutual fund is forced to sell investment positions to raise cash to meet shareholder redemption requests.
With Individual Retirement Accounts (IRAs) that do not allow shorting stock, inverse ETFs can provide short investment exposure.
If you are looking for a list of exchange traded funds then visit http://www.stock-ex.com. They have a nice directory of ETFs organized by country, investment focus, and fund type.
