Exchange traded funds

An exchange traded fund is an investment fund that comprises different securities and is traded on exchange much like a stock. This type of fund track stock or bond index like Standard&Poor's. Similarly like mutual funds ETFs have mixed portfolio consisting of various types of securities like stocks, bonds and commodities. Funds hold different underlying assets that are divided in shares with attached price which makes them marketable security that trades on exchange so its price can change during the trading day.

Exchange traded funds differ depending on their focus on different aspects of the market. Some funds have stock from hundreds and even thousands different industries while some other may focus on one particular industry sector. In the same manner some are interested in exclusively on U.S. securities while others have more global approach. Some examples of ETFs are bond ETFs that include different types of bonds (government, corporate and municipal bonds), currency and commodity ETFs invest in foreign currencies and commodities respectively while industry ETFs focus on specific industry.

This type of fund carries several benefits. ETFs provide investors with lover average costs. This is because it would be really expensive for investor to purchase every stock from funds pool individually because you have to pay a commission to a broker for every transaction. They generally tend to have lower expense ratios, percentage of your invested money that is charged for administrative and management expenses. Passively managed funds offer lower expense ratio while actively managed ones usually have higher expense ratios which can diminish your return on investment. It is important to understand how the fund is managed.

Investing in exchange traded fund is great way to diversify your portfolio at a reasonable price. Depending on the fund you choose you ca have access to stocks from various industries and market sectors. Properly diversified portfolio is the best way to manage risk.

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