What Are Their Advantages When Compared With Open End Mutual Funds?

The main advantage is that it provides you with flexibility of stock and the diversification of a mutual fund. That means that your investment will be more secure and you can buy it or sell it whenever you want. The combination of these two advantages provide investors with interesting financial tools.

Another interesting thing about exchange traded index funds is that they are passively managed. This means that, instead of investing hundreds of man hours in the process of beating the market index, this financial instrument will only mirror it's growth. This posture is the contrary of active management, where thousands of analysts are looking for hidden opportunities. Since passive management doesn't consume this amount of resources, it doesn't charge management fees to the exchange traded funds holders, saving money to the investors.

Type Of ETF's

The first ETF that appeared in the market was the Standard & Poor's Depositary Receipt (SPDR or also known as Spider), an ETF that followed the S&P 500 index. The SPDR was launched for the first time in 1993 in the American Stock Exchange (AMEX). Let's remember that the S&P 500 index is composed by 500 corporations chosen by a committee of professionals.

Their criteria of selection is based on the market size, the sector to which the company belongs, it's performance and many other variables. Since the S&P 500 index is always climbing up due to the fact that the economy is always growing, then it is no wonder that the SPDR has become a very interesting investing tool.

Among the major exchange traded funds, there is the Nasdaq-100 Index Tracking Stock (QQQQ), which represents the Nasdaq-100 (this index is composed by the 100 largest corporations in the world; but it doesn't include the financial sector). The QQQQ, also known as the cubes, is an excellent way to invest in the long term within the technology sector.

Barclays Global Investors, known as the largest money manager in the world, has it's own line of ETF's. known as iShares. There are almost one hundred iShares, many of which are traded at the American Stock Exchange and the New York Stock Exchange (NYSE). Some of the sectors in which iShares invest your money are Basic Materials, Energy, Natural Resources, Transportation and Utilities, among many others.

Another kind of ETF are the inverse exchange traded funds. The difference with this ETF's is that, when the index goes up, they go down. And when they go down, the ETF goes up. The three main companies who issue this kind of ETF are Profunds, Rydex Funds, and Potomac Funds. Until this moment there isn't a consensus among investors. Some of them think that inverse ETF's are a valid financial instrument, others think that they are a scam. If you aren't sure about them, it would be better to go for a traditional ETF.

So, if you want to make life easy for you, and don't want to complicate yourself with tons of information, then pick up a list of exchange traded funds and evaluate which one attracts you the most. It can be a commodity like copper or a industry sector like biotechnology. Either way, exchange traded index funds are an excellent way for someone who wants to buy a security for their first time in their life.

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