Exchange Traded Funds

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An exchange-traded fund, or ETF, is an investment vehicle traded on a stock exchange in the same way as a stock. ETFs, however, are like mutual funds in that they hold a collection of assets, usually stocks and bonds. Unlike open-ended mutual funds, ETFs can trade at a premium or discount from their net asset value (NAV). However, large-enough differences allow institutional investors to perform arbitrage by swapping blocks of securities for ETF shares. In practice this means that the difference between price and NAV is generally very small. For a comprehensive view of the ETF marketplace, refer to ETF Landscape:Industry Review from Barclays Global Investors December 2008.

Contents

Features

Costs

  • Commission: the up-front charge by your broker to buy or sell a stock or ETF.
  • Bid/ask spread: the price difference between what a seller asks and what a buyer offers for a stock or ETF.
  • Premium and discount: the difference between the trading price and the NAV of an ETF.
  • Expense ratio: the annual management fee for a mutual fund or ETF expressed as a percentage. It is charged directly to the fund/ETF.

The American Stock Exchange web site lists the daily closing bid-ask and premium-discount information for many popular ETFs.

General information about ETFs

ETF vs. Mutual funds

ETF vs. Vanguard ETF share class

ETF Provider Links

The five largest ETF providers hold $544 billion of the $573 billion in total ETF assets under management. (06/30/08)[source:Indexuniverse.com]. Here are links to the five major ETF providers ETF websites:

A complete list of ETF providers can be found at ETF and Index Fund Managers.

Academic Papers

  • Ali, Paul Usman and Gold, Martin L.,The New Model Index Fund(undated). MFAS Investment Advisors Research Paper. Available at SSRN: http://ssrn.com/abstract=275593 or DOI: 10.2139/ssrn.10.2139/ssrn.275593
  • Birdthistle, William A., "The Fortunes & Foibles of Exchange-Traded Funds: A Positive Market Response to the Problems of Mutual Funds" . Deleware Journal of Corporate Law (DJCL), Vol. 33, No. 1, 2008 Available at SSRN: http://ssrn.com/abstract=1013614
  • Huang, Jennifer C. and Guedj, Ilan, "Are ETFs Replacing Index Mutual Funds?" (March 31, 2008). Available at SSRN: http://ssrn.com/abstract=1108728
  • Poterba, James M. and Shoven, John B., "Exchange Traded Funds: A New Investment Option for Taxable Investors" (January 2002). MIT Department of Economics Working Paper No. 02-07. Available at SSRN: http://ssrn.com/abstract=302889

See also

How to Cite

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Mutual Funds
Mutual Fund Costs Mutual Funds and Fees • Mutual Funds: Additional Costs • Purchase fee • Redemption fee
Mutual Fund Strategies Fund of funds • LifeStrategy Funds vs Target Retirement Funds • Principles of Tax-Efficient Fund Placement
Exchange Traded Funds Exchange Traded Funds • Vanguard ETF Info • Vanguard ETF to Fund Ratios
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