An exchange-traded fund (ETF) is a security that tracks an index but has the flexibility of trading like a stock. Just like an index fund, an ETF represents a basket of stocks that reflects an index. The difference is that an ETF isn't a mutual fund - it trades just like any other company on a stock exchange. The high management fees and the lack of liquidity of index mutual funds have made ETFs increasingly popular investment vehicles. Almost every one of today's major indexes has an ETF tracking its performance, and most ETFs are passively managed by some form of trust company. These trust companies take on the responsibility of maintaining the portfolio of stocks within the index to which they are linked. The trust company transforms the portfolio into individual shares of ETFs, which are then sold and purchased on the AMEX like regular stocks, such as the Spiders and Diamonds ETFs.

Even though ETFs are passively managed and mimic a specific index, charges are incurred for these services. These charges are typically lower than those of index funds and are used for day-to-day operations, maintenance of the index portfolio, and payment of employee salaries. Part of the maintenance of the portfolio entails the collection and safekeeping of dividends paid by companies within the index portfolio. It is the duty of the trust companies to distribute these payments to the ETF stockholders; the distributions are normally made on a periodic basis.

  1. What exactly is an ETF portfolio?

    Learn what exchange-traded funds (ETFs) are and their advantages to investors, what a portfolio of ETFs is, and discover ... Read Answer >>
  2. What's the difference between an index fund and an ETF?

    Learn about the difference between an index fund and an exchange-traded fund and how index fund investing compares to value ... Read Answer >>
  3. Should I invest in ETFs or index funds?

    Learn advantages to investing in exchange-traded funds, or ETFs, and index funds, and decide whether to include them in your ... Read Answer >>
  4. Do ETFs pay capital gains?

    Learn about exchange-traded funds (ETFs), which can generate capital gains for their shareholders due to occasional and substantial ... Read Answer >>
  5. Why can you short sell an ETF but not an index fund?

    To answer this question, we should first define exactly what an index fund is. An index fund is a mutual fund, or a basket ... Read Answer >>
  6. What gives the best results, an index fund or an ETF?

    Investing in ETFs or index funds is a matter of personal choice, but market logic advocates ETFs for rebalancing funds and ... Read Answer >>
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