New to ETFs? Don’t worry. These products are relatively simple to trade and understand.
Structure: Registered under the Investment Company Act of 1940, ETFs are investment companies. They only sell and redeem shares in large blocks to brokerage houses or institutional investors, which in turn list those shares on the secondary market. This allows individual traders to buy and sell ETF shares to each other.
Operation: Each ETF has a unique ticker symbol and trades just like a stock. You can buy an ETF just like you would a share of Microsoft or General Motors.
Unique costs: Beyond the transaction costs of commission and slippage, each ETF also has an expense ratio. This is the percentage of fund assets the fund manager may withdraw each year to pay for operating expenses.
Regulation: Most ETFs fall under the governance of the SEC. Those that invest in commodity futures are regulated by the Commodity Futures Trading Commission.
Related markets: ETF-related innovations don’t stop with the ETFs themselves. Derivatives exchanges list both options and futures on ETFs, giving traders yet another layer of flexibility and access to today’s increasingly broad financial matrix.
