If you are researching ETF trading then you need to understand that Exchange Traded Funds, or ETF’s, are investment vehicles whose share price is tied to some underlying asset, such as a share of the S&P 500, 1/10th of an ounce of gold or $100 Australian Dollars. ETF trading is as easy as buying a stock for they are designed to function for the end-user exactly like a share of stock.
The difference with ETF trading is that when you buy a share of an ETF you are not drawing from a fixed pool of shares, or float, of a company. Rather, you are putting in an order to an institution vested with the power to buy blocks of shares of the ETF from the company that owns the fund. In this way your money flows into the ETF the same way that it does into a mutual fund. The order is processed, the shares purchased transferred to your name and the fund owner then goes out and acquires the assets represented by your order.
For example say you wanted to invest in a Gold ETF. If you were to buy 10 shares of the SPDR Gold ETF, GLD, you would then be buying the equivalent of 1 ounce of gold, since 1 share of the ETF is equal to approximately 1/10th of an ounce of physical gold. If the net buyers of gold outnumber the net sellers of gold then the amount of gold held by the fund would increase but the price of gold would not necessarily increase. There would be pressure put on the physical gold market to find supply at that price but it wouldn’t necessarily move the price of gold on the Futures Market, where the market price is set.
ETF investing is a means by which an individual investor may gain access to the ownership of a broad basket of stocks in a particular sector without having to do specific due diligence on any one company. If you believe that, for example, financial stocks have been oversold and are currently undervalued but you don’t know which bank to invest in, one could buy the XLF ETF which holds a basket of bank stocks.
ETF’s have, in general, lower overhead than mutual funds because they can hold cash to balance their NAV versus the current price of the underlying asset. This keeps their brokerage fees lower and the savings can be passed along to those who are participating in ETF trading.Previous Post » Different Types Of ETFs