What is ETF in the Stock Market?

Exchange-traded funds (ETFs) are among the most popular financial products that trade on the stock market. These funds behave exactly like stock but represent large collections of stocks instead of shares of just one company. They are executed the same as stocks and offer many benefits to investors that corporate stocks cannot provide.

Structure

An ETF may trade exactly like stock, by offering sales for purchase, but it is an actual fund with its own holdings and a fund manager. However, unlike a mutual fund, an ETF is openly traded on the stock market and investors are not bound by any contracts. Shares of an ETF may be bought and sold at any time, and ETFs are popular with day traders. A mutual fund, by contrast, incurs heavy management fees that reduce the value of its returns. Additionally, most mutual funds do not permit frequent buying and selling without penalty for early withdrawal.

Foreign Investment

Investing in the stock market returns of other nations can be a challenging endeavor. To buy foreign stocks directly, you need to either open a global trading account with access to other exchanges, or trade the small portion of foreign companies that do list on domestic exchanges. An ETF, however, can expose you to an entire foreign stock market by simply buying shares on your domestic exchange. These foreign ETFs actually hold the stocks of all the major companies that make up a particular index. When you buy into one of these, you get returns similar to that country or region. Many are available, including "EWZ," which tracks Brazil, "EZA" for South Africa and "ILF" for Latin America.

Sectors

Many traders seek to benefit from swings in a particular industrial sector. Normally, this would require buying stocks across the many companies that make up a sector. This incurs high commissions if you want general exposure and the maintenance of such a portfolio is time-consuming. Sector-specific ETFs obviate these hassles. If you simply buy shares of "XLF," for example, you immediately receive the same returns as the overall financial sector. This fund contains all the major banks, brokerage firms and other financial institutions included in the U.S. S&P 500. Other such ETFs include "XLE," which tracks only the energy sector, and "XLK," which tracks technology stocks.

Leverage

ETFs offer trading opportunities that even diversification across many stocks would not normally provide. Leveraged ETFs allows traders to increase the potential returns (and risks) from their predictions by performing at double or triple the rate of the market they track. "SSO" rises at twice the rate of the S&P 500. If this index rises by one percent in a day, SSO rises by two percent. "FAS" offers triple the returns of the financial sector. If the XLF financial ETF rises by one percent, FAS will rise by three percent. Exposure to the downside is also possible. "TYP" will rise three percent if the overall technology sector declines by one percent.

Gold

Financial media and investment advisers often suggest diversification in gold. Owning gold can be highly profitable as a hedge against inflation or the fall of currency values. And gold is not subject to stock market swings. But physically purchasing gold bullion or gold products is not efficient for many investors. The "GLD" ETF offers the same returns as the price of gold from trades on a stock exchange. Instead of buying gold, just buy shares of GLD, and the returns are nearly the same for much easier access.

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