Trading ETFs

• An exchange traded fund is used to track any combination of stocks using a single ticker symbol. While ETF composition may be similar to mutual funds, ETFs do not incur management fees. Rather, they trade like regular stocks on an exchange, with no contracts or withdrawal policies. Shares are bought and sold just like stock. Most ETFs offer other benefits of stock trading, such as the ability to short shares or buy on margin. For most investors, there is little to differentiate the process of trading an ETF from that of any stock.
  
  

Composition

• An ETF is created by an issuing authority that combines a large collection of stocks into a single account. Shares of this basket of stocks are offered to the public. Each share follows the average performance by all the stocks in the account. The combination of stocks widely varies, but a central theme is always present in an ETF. The stocks may together represent exposure to a foreign stock market, a domestic stock market sector, a particular index or commodity.
  
  

Benefits

• Investors who buy an ETF can conveniently get access to the overall returns of a market without buying any individual company's shares. This obviates the commissions of diversification and also reduces the research time on any individual company's stock. The "Select Sector SPDR" ETFs, for example, track American economic sectors. The "XLF" ETF is made up of the stocks of American banks, while "XLE" follows American energy companies. Buying one of these offers similar returns as a diversified portfolio of all the stocks of that particular sector. Additionally, commodity funds such as "GLD," which tracks the price of gold, offer the same returns as physically purchasing bullion.
  
  

Foreign Markets

• One of the most useful advantages of the ETF model is exposure to foreign markets. Purchasing shares of international stock often requires a global trading account with access to foreign exchanges, because many international companies do not do not list on exchanges outside their own country. If an American investor wants exposure to the Brazilian stock market, he merely needs to buy shares of the "EWZ" ETF, which holds many Brazilian companies and tracks the stock market index there. ETFs exist for most countries, so any investor can participate in the growth of emerging or developed markets.
  
  

Leverage

• It is possible to buy ETFs that offer considerable leverage as well as inverse returns of a market. If an investor believes the American stock market will perform well over any period of time, she can buy shares of "SSO," which offers double the returns of the S&P 500 index. More specific and speculative positions may be opened as well. "FAS" offers triple the overall returns of the financial sector. But if you think the stock market may decline, "SDS" offers double inverse performance of the S&P 500 while "FAZ" offers triple the inverse of the financial sector. If banks overall decline in stock market value, this ETF is constructed to rise by triple the amount of their fall on any given day. Dozens of such trading vehicles are available to ETF investors for considerable flexibility not possible in conventional stock trading.