Exchange Traded Funds
Exchange traded funds are a burgeoning investment vehicle. Wikipedia indicates that the number of these funds has blossomed from less than 100 to over 400 in 2006 - a sure sign that these are something to be watched.
Basically exchange traded funds are investment vehicles where the return is linked to some sort of index. So unlike a traditional individual stock where your investment ebbs and wanes with the specific company, with these your returns are linked to the underlying index. For example you might invest in a fund that tracks with the Nasdaq. Your returns on that fund would then be correllated to the performance of the Nasdaq.
There are at least two distinctive advantages of these types of investments over traditional mutual funds investments. First, these funds can enjoy more favorable tax treatment (depending on your jurisdiction). Secondly, ETF’s generally have a lower expense ratio. Over time these lower expenses can compound significantly, resulting in a higher return. That spells more money for the investor.
The website www.etfguide.com also has more details on ETF versus mutual funds.