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Exchange Traded Funds

An exchange-traded fund is a hybrid form of both a mutual fund and a close-ended fund that qualifies as an open-end investment company. (Open end investment companies allow for the issuance and redemption of fund shares at any time.) As a collective investment vehicle (an investment arrangement in which purchases are made from a pool of money derived from the sale of fund shares) an exchange-traded fund exists to track a given stock index.

Shares in exchange-traded funds are bought and redeemed in large blocks (normally 50,000 shares) by institutional investors (brokerage houses.) Individual investors then purchase small blocks of shares at a premium from the brokerage thus allowing the brokerage to make a profit. This arrangement lowers the net asset value of each share (the value of the share calculated by dividing the fund's value by the total shares purchased) to the individual investor, however, exchange-traded funds are regarded as more efficient to operate and thus less expensive to manage.

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