1: What's an ETF?

ETFs, or exchange-traded funds, are an increasingly popular type of investment which resemble mutual funds but trade throughout the day like stocks:

  • They're index-based, representing baskets of stocks, bonds or other assets (see how indexes work), and are often lower-cost than comparable index-based mutual funds.
  • They offer a wide variety of investment possibilities, from the broad U.S. or global markets to specific sectors, regions and countries, and different investment styles (browse ETFs).

ETFs are growing quickly, driven by demand from both individual and professional investors:

  • As of April 2007 the assets invested in U.S. ETFs totaled $466 Billion, compared to about $10.5 Trillion for mutual funds overall (source: ICI). Total assets invested in ETFs grew 40% in 2006, versus 17% growth for mutual funds.
  • There are currently over 400 ETFs approved by the SEC and trading, and many more awaiting approval. The first exchange-traded fund (ETF) was approved by the SEC and launched in 1993.
  • ETF growth is being driven by individual investors, who value the lower costs and tax advantages, as well as professional investors (institutional money managers, hedge fund and even mutual fund managers) who view ETFs as high powered, flexible tools to execute their portfolio strategies.