Structure

An ETF may trade exactly like stock, by offering sales for purchase, but it is an actual fund with its own holdings and a fund manager. However, unlike a mutual fund, an ETF is openly traded on the stock market and investors are not bound by any contracts. Shares of an ETF may be bought and sold at any time, and ETFs are popular with day traders. A mutual fund, by contrast, incurs heavy management fees that reduce the value of its returns. Additionally, most mutual funds do not permit frequent buying and selling without penalty for early withdrawal.

Sectors

Many traders seek to benefit from swings in a particular industrial sector. Normally, this would require buying stocks across the many companies that make up a sector. This incurs high commissions if you want general exposure and the maintenance of such a portfolio is time-consuming. Sector-specific ETFs obviate these hassles. If you simply buy shares of XLF, for example, you immediately receive the same returns as the overall financial sector. This fund contains all the major banks, brokerage firms and other financial institutions included in the U.S. S&P 500. Other such ETFs include XLE, which tracks only the energy sector, and XLK, which tracks technology stocks.

Leverage

ETFs offer trading opportunities that even diversification across many stocks would not normally provide. Leveraged ETFs allows traders to increase the potential returns (and risks) from their predictions by performing at double or triple the rate of the market they track. SSO rises at twice the rate of the S&P 500. If this index rises by one percent in a day, SSO rises by two percent. FAS offers triple the returns of the financial sector. If the XLF financial ETF rises by one percent, FAS will rise by three percent. Exposure to the downside is also possible. TYP will rise three percent if the overall technology sector declines by one percent.

Gold

References

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