Consider the advantages of trading Exchange Traded Funds (ETFs).

Exchange Traded Funds or ETFs are portfolios of stocks, bonds, currencies or commodities that trade as a single stock on a stock exchange. ETFs first traded in 1993. They have gained enormous popularity over the last decade. ETFs are not mutual funds, but they offer some of the same advantages as mutual funds while trading like a stock. ETFs hold a pool of securities and are structured to track a specific index, sector, currency or commodity. There are over 740 ETFs that track numerous market indexes or sectors.

Some of the well known indexes would include the S&P 500, Dow Jones Industrial Average, and the NASDAQ Composite. There are sector ETFs that track market sectors such as technology, healthcare, financial, foreign equity markets, foreign currencies and even commodities. In simplest terms, ETFs are funds that track the performance of these indexes or sectors.

The performance objective of an ETF is to track the performance of a sector or index as closely as possible. ETFs do not try to outperform their related sector or index. This type of performance objective leads to a fund management style known as ”passive management”. The passive management style differs considerably from actively managed mutual funds that rely on an investment advisor to actively manage a stock portfolio.

The passive management structure has advantages and disadvantages compared to an actively managed portfolio. If ETFs meet their investment objective, they will not out perform or under perform their index or market sector. ETFs have fewer transactions than an actively managed mutual fund and therefore have lower fund expense ratios compared to actively managed funds.