Back to Basics: What Is An ETF?

August 20th at 1:00am by Tom Lydon

Do you think you know what an exchange traded fund (ETF) really is? If so, read on.

An exchange-traded fund (or ETF) is essentially a mutual fund that trades like an individual stock, which has been an age-old comparison at this point.Anytime the investor or trader feels like trading the fund, they can do so, same as a single stock. The total popularity of the ETF business has caused a massive birth of new and unique funds that trade with the ease of a stock. [ETF Examination.]

Jay Keapple for The San Francisco Chronicle says that investors can now take long and/or short positions – as well as in many cases, leveraged long or short positions – in the following types of securities:

  • Foreign and Domestic Stock Indexes (large-cap, small-cap, growth, value, sector etc.)
  • Currencies (yen, euro, pound etc.)
  • Commodities (physical commodities, financial assets, commodity indexes etc.)
  • Bonds (treasury, corporate, munis international)
The major differences of an ETF option versus an index fund option is theĀ  fact that trading options on ETFs can result in the need to assume or deliver shares of the underlying ETF. This is not the case with index options. The reason for this difference is that index options are “European” style options and settle in cash, while option on ETFs are “American” style options and are settled in shares of the underlying security. [ETF Discounts and Premiums.]

For more stories about ETFs, visit our ETF 101 category.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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