You may have heard of ETFs. What exactly are they? Introduction Exchange-Traded Funds, or ETFs, are basically like mutual funds that trade on stock exchanges, with a few differences. They have many of the advantages of stocks while avoiding some of the downsides that mutual funds have.

Why Use ETFs Have you ever wanted to buy shares of an index like the S&P 500? You can’t do that directly but you can do it indirectly through ETFs. Those who supervise ETFs usually invest in the same stocks or futures that make up an index or commodity in an effort to make the ETF’s value per share track a certain index or commodity up and down. This allows anyone with access to stock trading the ability to easily trade indexes or commodities indirectly.

Example: SPY – SPDR Trust Series I: One of the most well known ETFs is SPY, who’s goal is to track the price and performance of the S&P 500 index. It will not be the same price as the index but its chart should have the same shape as the index, within one or two percent most of the time.

Example: QQQQ – PowerShares QQQ Trust, Series 1: The purpose of this ETF is to track the Nasdaq 100 index by buying and selling shares of the stocks that make up the index.

Example: EEM – iShares MSCI Emerging Markets Index Fund: This ETF tries to track the price and performance of the MSCI Emerging Markets index, which follows the performance of international stocks. This fund is non-diversified, which means it is has more risk built in as other funds because it is focused on a specific sector.

Example: USO – United States Oil Fund LP: This commodity ETF tracks the price of oil prices, West Texas Intermediate light, andsweet crude oil, to be exact. There strategy is to continually buying and selling futures contracts for oil, natural gas, and several other things. It is also non-diversified but a convenient way to make trades based on oil prices. Benefits of ETFs The main benefits of ETFs include diversity, the same tradability as stocks, low costs, tax efficiency, and transparency of assets.

What are ETFs ETFs are somewhat complicated to explain, but they are funds that can be structured in a few different ways. They are usually passively managed, which means the managers do not have to constantly decide which investments need to be bought and sold in order to increase the value of the fund. Instead, the managers simply have to make sure the fund tracks a certain index or commodity as closely as possible, which can be as simple as owning the stocks that make up an index and adjust the shares accordingly so that the price follows the index’s chart. Where to Find Them

You can learn more about ETFs at brokerages, offer a free stock screener, along with an ETF screener. Yahoo! Finance has good information that lets you view a list of the best performers in several different categories. For detailed information on day trading see our website: http://HowTheMarketWorks.com.