WEST PALM BEACH, FL (HEDGECO.NET) – What are ETFs one may ask? ETF is an acronym which stands for Exchange Traded Funds, they are index funds which trade on stocks, they are fairly new, and have beenavailable for trading in the United States fairly recently, with the NASDAQ market pioneering its development. While Mutual fund trading is marked by price inefficiencies, ETFs are far moreefficient, in the sense that they mirror and track the underlying index very closely.

Because of the price inefficiencies that have given room to wide spread scandals, some investors have switched to ETFs as alternative to mutual funds according to published reports. The process of trading an ETF generally sidesteps some of the scandals revealed in the mutual fund investigations. ETFs are largely immune to the market-timing abuses which are currently being investigated by state and federal industry regulators.

Part of the reason stems from the fact that unlike mutual funds, which have their prices set once a day at 4 p.m. EST. An ETF trades continuously on exchanges; hence it does not leave room for price manipulations and market timing strategies that are largely abused by influential market participants.

ETFs can also be sold short as stocks are; a strategy used to bet that prices might fall. More importantly, ETF trading avoids the uptick rule, a strategy to sell stocks short only when the last trading activity in the stock pushes its price up. Such strategy is used to prevent massive declines which may result from increased short selling activities. For ETFs, that rule does not apply to them; this means ETFs can be bought and sold short regardless of market conditions.

Currently there are about 100 ETFs available for trading, ranging from SPDRS to Diamonds, tracking both broad and narrow exchange indexes. Some of the disadvantages of ETFs include its high commission cost. They are not made for everyone, and trading these instruments require broad knowledge about the stock market indexes upon which such ETF is constructed.

The unique thing with ETFs is money is not exchanged when you sell them. An authorized participant buys large block of ETFs on the open market and sends it to the custodial bank and in return receives back an equivalent basket of individual stocks which are then sold on the open market or typically returned to their loanees. They trade in large blocks, are very suitable for managers handling large blocks of trades or institutional investors with large sums to invest. ETFs are currently not traded in all exchanges, but as its popularity continues to grow, expect to see these trading instruments on every global exchange.

Paul Oranika
Editor-in-Chief
HedgeCo.Net

HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY!