ETF Trading
Exchange Traded Funds (ETFs) are mutual funds that can be traded as you would trade a stock. An ETF has a ticker symbol and also an expense ratio, which are assets that are used to pay for operating expenses. They are, once you understand the basic principles, very easy to understand and to trade.
ETFs were at one time only used as a way to invest in the major indexes but now they can be traded over a wide variety of markets and sectors. Now, ETFs may be traded without having to open a separate brokerage account for each. They may be purchased through pretty much any brokerage account. They can even be traded in most IRAs, 401K and a number of other retirement accounts too.
So, as an example, let us presume you wish to invest in Crude Oil (light, sweet crude oil). Crude Oil is traded on NYMEX. If you are not able to access NYMEX through your current account, you would have to open up a separate brokerage account to get access to this commodity.
With ETFs however, what you would need to do is invest in the ticker symbol: CUSIP. This ETF then will track the price of West Texas Intermediate (WTI) light, sweet crude oil which will be delivered to Cushing, Oklahoma, and this price is the primary benchmark in the U.S. for crude oil.
This is a much easier transaction because it trades just as a stock would. As is the case with stocks, ETFs trade through the day and are priced by the market, not necessarily at their net asset value (which is unlike mutual funds that can only trade at their settled net asset value at the end of the trading day). To a broker the trading of an ETF is the same as it is when trading a stock. Hence it is the same fee to trade the ETF as it is to trade a stock.
There is no need to be concerned about the calculation of the amount of contracts to be bought or contract expiration dates either as would be the case with futures accounts. The EFT will take care of this all anyhow.
Even though ETFs trade unlike those of the traditional mutual fund, it is the same when it comes to buying, holding or selling.
But when it comes down to it, the decision to use ETFs is entirely up to you. They are ideal for day trading, swing trading and long term, “buy and hold” investments. Because ETFs trade like stocks, they minimize trading restrictions often imposed by those of mutual funds.
For example, on some Fidelity Mutual Funds, you would face a short term holding fee of $75.00 if you traded your mutual fund without holding it for approximately 90 days (you should check with your fund company to confirm their particular policy here). If you were attempting to day trade or swing trade this mutual fund, you would have to pay $75 dollars every time you violated this holding period. If you were to purchase an ETF instead, you would only have to pay your brokerage fees for a stock transaction and that is all there is to it.
ETFs therefore have grown in popularity and have been accepted by the professional and novice investor as a valid investment choice and for obvious reasons. They have made it possible for very many people to invest into markets that were before not at all easily available. So the best choice to make now is to research the range of ETFs and decide which are the best ones and fit in well with your investment portfolio.
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