Who's in charge of managing exchange-traded funds?

By Investopedia Staff AAA
A:

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.

RELATED FAQS

  1. How does seasonality affect the financial services sector?

    Take a look at some of the ways that seasonal trend analysis can be applied to various financial services providers and the ...
  2. What are the advantages of an index fund over an ETF?

    Diversifying a portfolio is one of pillars of investing basics, and an index fund can provide an investor with exposure to ...
  3. What are some of the most popular ETFs that track the Internet sector?

    Learn about leading Internet exchange traded funds (ETFs). Find out how to invest in a diversified basket of stocks from ...
  4. What are the most common ETFs that track the financial services sector?

    Examine common exchange traded funds that track the financial services sector and learn about past performance, expense ratios ...
RELATED TERMS
  1. Next Generation Fixed Income (NGFI) Manager

    A Next Generation Fixed Income (NGFI) manager is a fixed income ...
  2. Next Generation Fixed Income (NGFI)

    Next generation fixed income is an innovative approach to investing ...
  3. Annual Crediting Cap

    The maximum rate of index growth that an annuity will be credited ...
  4. Lion economies

    A nickname given to Africa's growing economies.
  5. Security Market Indicator Series - SMIS

    An index that uses the performance of a sampling of securities ...
  6. Factor Investing

    An investment strategy in which securities are chosen based on ...

You May Also Like

Related Articles
  1. Mutual Funds & ETFs

    These 4 Precious Metals ETFs Help Combat ...

  2. Mutual Funds & ETFs

    Preferred Stock ETFs: Are They Right ...

  3. Mutual Funds & ETFs

    Why Big Russia Bettors Should Consider ...

  4. Mutual Funds & ETFs

    PIMCO vs. BlackRock: Weighing Mega Fund ...

  5. Stock Analysis

    Is the GXG ETF the Best Way to Play ...

Trading Center