More on ETFs

ETFs, Exchange Traded Funds, offer the advantages of both stocks and mutual funds.

Like mutual funds, ETFs include a number of stocks, this diversification offers less volatility than holding a single stock. There are tax advantages to holding ETFs, such as lower capital gains taxes. They generally offer lower fees than mutual funds. This is due to the stocks held in the ETF being changed infrequently. ETFs are not actively managed like mutual funds, each has a specific class of stocks that it holds, and are only changed when necessary.

Like stocks, they are highly liquid (frequently traded). The cost of trading is the same as trading stocks, and any number of shares can be traded. Advanced trading techniques can be used such as shorting, limit and stop orders, buying (calls) or selling (puts) options, and ETFs can be purchased on margin.

There are several companies that offer ETFs: Barclay's iShares, Vanguard VIPERs, and State Street's StreetTracks.

Update 12/23/04: Today I found PowerShares, another ETF.

Update 1/4/05: Merrill Lynch offers HOLDRS.