Exchange Traded Fund - Explained
What is an ETF?
Written by J. Mance Gordon
Updated at April 22nd, 2024
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What is an Exchange Traded Fund?
An Exchange Traded Fund (ETF) is an investment fund or a security that tracks an underlying index such as stock portfolio or bonds. An ETF is traded on stock exchanges, ETFs are not shared assets, they are more like stocks that get listed on an exchange. However, when listed on stock exchanges, the prices of Exchange Traded Fund are volatile, they fluctuate as they are traded in the market. ETFs are funds or securities used to track the performance of a stock portfolio or an asset. Some ETFs serves as resources for securities and commodities markets. ETFs are often attractive to investors or financial specialists because they are traded in high volume and at lower costs than mutual funds.
How Does an Exchange Traded Fund Work?
In the United States, ETFs are subject to the regulations of the Investment Company Act of 1940. Majority of ETFs are offered as open-ended funds while some are issued as Unit Investment Trusts (UIT). Exchange traded funds are commonly known for their ability to acquire underlying resources such as remote funs, bonds and stocks and divide their ownership in form of assets. Usually, ETFs set up as UIT have redemption date which is the date it is expected to fully mature, these dates can however be extended. ETFs issued as UIT can act as correspondents to the standard open-ended funds. Profits or premiums are paid on ETFs which investors enjoy. In terms of cost, ETFs are more effective than mutual funds, with the decline in rate of mutual funds in recent times, ETFs are known to me cost effective.