What is an ETF?

ETF stands for Exchange Traded Fund. In the old days they were called Closed End Funds or CEFs. There are Dow ETFs, Gold ETFs, Oil ETFs, Shipping ETFs, Solar ETFs, Real Estate ETFs, Steel ETFs, Financial Sector ETFs - you name it and if there isn't already an ETF for it, you can be sure that one is being developed somewhere and will be available soon.

Buyers and sellers trade ETF shares on an exchange just like they trade stocks. If there are more buyers in the market, the price is bid up. If there are more sellers in the market then the offered price for shares will be driven down.

So ETFs are not priced at the end of each day like mutual funds. Instead, their price is based upon best bid and ask prices gathered at a stock exchange much like an equity stock.

To the extent that an ETF invests in underlying securities, making one investment in a single ETF can give an investor exposure to many different stocks. This is similar to the diversification benefits of owning shares in an open-ended mutual fund.

ETFs charge management fees; this slippage is usually factored in to the pricing of the shares. Since ETFs are typically more passively managed than open-ended mutual funds, the management fees are generally lower for ETFs compared to mutual funds.