Stock CertificatesExchange traded funds or ETF’s are just one of the many varieties of financial instruments available in the market today. Such funds may be considered as a type of instrument closely resembling a mutual fund but may also have their own distinctions. Here are some basic ideas of what ETF’s are and how they differ from conventional mutual funds.

ETF Explained

An exchange traded fund is a type of financial instrument usually composed of a collection of stocks. It may be in this aspect that it resembles a mutual fund. But the distinction is only limited to this. There are quite a number of differences between a mutual fund and an ETF the more you understand it. In simple terms, an ETF may be considered as a mutual fund that can be traded like a stock.

ETF And Mutual Fund

What an ETF usually represents is a collection of stocks that best reflects the performance of a certain index. But unlike a mutual fund, the ETF can be traded similar to a stock. And just like a stock, the price of a ETF usually undergoes price changes throughout the day. It all depends on supply and demand which pretty much makes it perform like a stock.

ETF Gains

An exchange traded fund usually gains whenever the index it is being based upon goes through favorable results. This means that if the overall index gains, so will the ETF. But bear in mind that there is usually no guarantee that the ETF may be gaining just as much as what the index may reflect. There may be some differences on gain results between the year-end return of the index to that of an ETF.

ETF Advantage

One advantage of having an ETF is that an individual may enjoy the diversification offered by an index fund as well as the flexibility of trading it as a stock. Owners of ETF’s can short sell them, buy as little as a single share as well as on margin. Another advantage of an ETF is that it generally requires a smaller expense in owning as compared to an average mutual fund. Trading ETF’s usually require paying the same broker commission as any regular trade.