"What are Exchange Traded Funds (ETFs)"
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Exchange Traded Funds or ETFs started January 29, 1993. The first ETF was called Standard and Poor's Depositary Receipts (SPDR) and from its initials quickly became known as "Spiders." Spiders track the S&P 500.
Exchange Traded Funds are the Nearly Perfect Investment Vehicle
Exchange Traded Funds ETF are most often described as a cross between index mutual funds and shares of stock. There's a pool of a large number of stocks, usually determined by some index or sector, and shares are issued on that which can be bought and sold just like shares of stock representative ownership interest in a single company and are bought and sold.
Some ETFs track stock indexes, some various stock market sectors, some stocks of single countries, some Real Estate Investment Trusts (REITS) and some gold.
The U.S. Securities and Exchange Commission (SEC) treats Exchange Traded Funds as mutual funds with the characteristics of stocks.
Unlike open-ended mutual funds, they can be bought and sold on the secondary market (the regular stock exchanges) throughout the day just like shares of individual companies. The record of buying and selling ETF certificates is done by the Depository Trust Clearing Corporation. That's the same U.S. government agency that records individual stock sales.
The process of getting this new form of security approved for sale by the SEC took 3 years. To figure out how to regulate it, they finally classified it as a unit investment trust / UIT, a little known kind of mutual fund.
Each share of an ETF fund represents an undivided interest in the entire assets held by the fund.
However, unlike shares of regular unit investment trusts and closed end mutual funds (whose shares can also be bought and sold on the secondary market), shares of ETFs can be created and redeemed. This is done by what's called a participating party or authorized participant.
Therefore, Exchange Traded Funds are the cheapest and easiest way to buy a broad index.
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