What Are ETFs?

ETFs are essentially mutual funds that trade on a stock exchange — ETF stands for exchange-traded funds. They are passively managed portfolios of stocks, bonds, commodities or other assets that strive to generate the same investment return as a particular market index. For example, the Diamonds Trust ETF (DIA) seeks to earn the same return as the Dow Jones Industrial Average by holding the same 30 stocks that compose this well-known index. Likewise, the Standard & Poor's Depository Trust ETF (SPY) strives to generate the same return as the S&P 500 Index by holding the same 500 stocks that make up the S&P 500.

ETFs are more tax efficient than most mutual funds and they don't require a minimum investment to get started — someone looking to invest as little as $100 can buy an ETF, rather than the $2,500 minimum required by many mutual funds.

There are more than 600 ETFs from which to choose and the number is growing every day. ETFs cover practically every sector of the market, including small-, mid-, and large-cap stocks; growth and value stocks; foreign stocks; precious metals; real estate; foreign currencies; commodities such as oil and steel; and every major economic sector (basic materials, consumer goods, healthcare, technology, telecommunications, etc.).

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