In recent years, exchange-traded products, “ETFs,” have become increasingly more popular on Wall Street and in the investor community. Institutional investors and retail investors alike have invested in exchange-traded products. Astoundingly, exchange-traded funds are a trillion-dollar market that continues to grow in value with passing time. While some ETFs are like mutual funds, others are a speculative gamble. There are many ETFs that investors should be wary of before deciding to invest. Not all ETFs are created equal.
What are Exchange-Traded Funds and How Do They Work?
Exchange-traded funds are securities that track an index, basket of stocks, bonds or a commodity. For an investor to own an ETF is the equivalent of indirectly holding a share of the total basket of underlying assets. In return, the investor receives a proportional amount of the fund’s profits and residuals. Investors can also use exchange-traded funds as a tracking mechanism for exposure to a specific index or collection of securities.