Exchange-Traded Funds (ETFs)

Exchange-traded funds, or ETFs, are a type of UIT that contains stocks, bonds, or other assets. The assets are usually chosen so that they track an index. Like closed-end funds, ETFs are bought and sold on an exchange through broker-dealers, and individual ETF shares are not redeemable. The exception is that large investors or institutions can purchase a creation unit and redeem it for the underlying assets.

The market price of the ETF remains close to the per-share NAV of the underlying assets. This is different from closed-end funds, whose prices are determined by supply and demand, because the shares cannot be redeemed. For this reason, the SEC classifies ETFs as open-end companies or unit investment trusts, even though, in most other ways, ETFs are more similar to closed-end funds.

The most well-known ETF is the Standard & Poor’s Depository Receipt, whose acronym SPDR is often referred to as “spider.” Buying SPDR shares allows an investor to imitate the performance of a broad index (the S&P 500) without paying all the costs of an index fund. In addition, ETFs offer more liquidity than mutual funds: they can be bought and sold at any time throughout the day, and investors don’t have to wait for the NAV price. ETFs also can be purchased on margin or sold short.

Additional advantages of ETFs include diversification at a lower cost than mutual funds. Also, ETFs tend to b