What Are EFTs?

September 15, 2006 | By | Reply More

ETFs are Exchange Traded Funds which consist of a group of securities, commodities or derivatives that are traded as shares on a stock exchange.

Stock market indexes, for example the S&P 500 or the FTSE, commodities such as oil or gold, or a specific market sector such as aviation, energy or utilities can all be traded as ETFs

ETFs should not be confused with Mutual Funds or Unit Trusts, although they are all considered as open ended, meaning that the total value of a fund can fluctuate daily.

As shares are issued or redeemed by investors so the number of shares outstanding is constantly changing.

ETFs offer some of the advantages of Mutual Funds and Unit Trusts* but are traded like a stock on exchanges with a constantly changing bid to offer price that does not necessarily accurately reflect the underlying value of their composition at any given time.

Unlike ETFs, the price to buy or sell Mutual Funds and Unit Trusts is directly related to the daily total value of the fund and the shares or units outstanding.

Advantages of ETFs

  • The specific structure and legal framework of ETFs can vary around the globe but all have important features in common.
  • They will have an exchange listing and can be continually bought and sold on the same basis as other stocks and shares during trading hours.
  • In the majority of cases they are not actively managed but are index linked.
  • ETFs offer more flexibility than Mutual Funds but enjoy the same spread of risk.
  • They are traded throughout trading hours unlike Mutual Funds.
  • They can be sold short or be bought on margin making them attractive to speculators and active traders as well as long-term investors.
    • Annual management charges compare favorably with the cheapest mutual funds.

Disadvantages of ETFs

  • Brokers charge commission on both sides of the trade and trades are subject to slippage, which is the disguised extra dealing charge of the bid-ask spread in exactly the same way as trading stocks and shares.
  • It is always worth the trouble to study the prospectus for any ETF before investing.
  • Check with the tax authorities in your country of residence as some have a more benign attitude to ETFs than others.

* Unit Trusts have a similar structure to US Mutual Funds but are traded primarily in the UK.

Another Alternative for accessing the Gold Market

Exchange Traded Gold Securities

A similar investment vehicle to ETFs and traded on the London, New York, Australian and South African Stock Exchanges For more information go to www.exchangetradedgold.com

Precious Metal ETFs

Three to consider

  1. StreetTracks Gold  (GLD)  – tracks gold
  2. IShares Comex Gold Trust  (IAU)  – tracks gold
  3. IShares Silver Trust (SLV)  – tracks silver

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Category: Exchange Traded Funds

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