Funds With Benefits: ETFs That Track A Major Index For You
James Dennin, Kapitall: ETFs that track an index are kind of like mutual funds behaving like stocks. If that seems confusing, read on.
One way for investors to combine the diversification of a mutual fund with the benefits of trading stocks is to look at exchange traded funds (ETFs). Invented in 1993, ETFs trade on public exchanges exactly like stocks, but contain bundles of assets, sort of like a mutual fund.
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ETFs appeal to more active traders and investors, because unlike mutual funds, they can be traded throughout the day. Investors who want to make bets on a particular index – as opposed to single stocks – can buy ETFs made up solely of stocks that trade on that index.
Conversely, ETFs can also be used to make more speculative plays. They can be shorted like stocks can, and have lower fees than mutual funds – because they are usually traded through a broker - and you can buy as many (or as few) shares as you want.
Click on the interactive charts below to view prices for these ETFs that track an index over time.
As you can see, ETFs often trade extremely closely to the index that they mirror. However, they can also be purchased with varying degrees of volatility. Some ETFs offer greater risk/reward potential than the index they are following, while some offer less.
Another benefit to ETFs is that they make it incredibly easy to diversify, because you can bet on trends as opposed to having to pick winners and losers within that trend. There are ETFs tracking emerging markets, specific countries, specific industries and even certain kinds of products. There are ETFs that trade large caps and small caps and mid caps in between.