An exchange traded fund (ETF) is a financial instrument that is listed on the major stock exchanges and is traded like common stock. Unlike mutual funds, ETFs are created to mirror the price performances of particular stock indices, bonds, currencies, and commodities. For instance, several ETFs exist that mirror the price of gold. This allows the common investor to invest in gold without needing the sometimes excessive capital required to buy or sell gold futures or gold bullion itself. Likewise, there are ETFs that mirror oil prices, Eurodollar prices, and even the prices of stock indices like the S&P 500 and NASDAQ 100.
ETFs have been around since the early 1990s. The first ones were listed on the Toronto stock exchange in 1990; they did not reach the American exchanges until 1993. From there, ETFs have spread all over the world. In early 2010, there were more than one hundred widely traded ETFs, and they showed no sign of slowing down in their expansion.
There are many good reasons to pursue an ETF investment strategy. One is diversification. An index ETF that mirrors the S&P 500 stock market index would be a good example. A firm will set up such a fund by investing a sum of money in each individual stock that comprises the S&P 500, so that when an investor purchases the fund's issue, he or she will own a small part of the total S&P 500 investment. That represents instant diversification spread over 500 stocks in one ETF investment.
Another advantage is transparency. It is easy for an investor to know what the price of the ETF should be, because he or she can monitor the market mirrored by the ETF. The contents of the basket of stocks, bonds, currencies, and commodities in a traditional mutual fund can shift based on the discretion of the fund's managers. This shifting can result in confusion for the investor trying to track and anticipate the price of his or her investment.
When searching for a good ETF investment, an investor should first choose a market in which he or she wishes to invest. ETFs exist for most major stock indeces, United States bond issues, world currencies, and commodities – there is no shortage of markets from which to choose. There will most likely be many companies offering ETFs for any given market.