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ETF (Exchange-Traded Fund) is an index fund that is traded like a stock. Unlike a mutual fund, no stocks are traded. ETFs are linked to some sort of index, like the Nasdaq 100. But, the price of an ETF is not based on the index, but on the free market pricing of the ETF.

So, how are the prices of the ETF related to the underlying index? How do they move in sync if both are traded independently? It seems like the key is that buying an ETF means borrowing stock certificates that are on the index. And selling ETFs are giving them back.

Advantages over mutual funds:
- Can be traded at anytime. There are no penalties for trading as often as you like.
- Lower maintanence fee.
- No minimum requirement.

Disadvantages over mutual funds:
- Is not good for periodic deposits since a trade fee is applied every time you buy.
- Generally does not reallocate assets.

A good explanation of the details of how ETFs work is here.

Notable ETFs:
SPY - S&P 500 index
QQQ - Nasdaq 100
DIA - DJIA
IVV - iShares S&P 500

Research:
Yahoo Finance
Morningstar
CNN Money
MSN Money
Fidelity
ETF Zone

What are ETFs:
Fool
Investopedia

Posted: 2007-02-12 23:58:34


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