|
 What
is an ETF?
An exchange-traded fund is an index fund that trades like
a single stock. Until the development of the ETF, this was
never before possible. An ETF is a passively held basket of
stocks that reflects the composition of an index, like the
S&P 500, Russell 2000, or the Nasdaq 100.
The ETF's
trading value is based on the net asset value of the underlying
stocks that it represents and the spread between the bid and
asking price. Think of it as a index mutual fund that you
can buy and sell in real time at a price that changes throughout
the day.
Of course,
this is only of value if investors can predict the future
direction of indexes. Unfortunately, there is a mountain of
academic research that indicates this is an impossible task
due to the random
nature of the news that moves all markets and the
efficiency of which that news is incorporated into asset prices.
Therefore, the only logical and prudent investment strategy
is to buy a risk-appropriate
and efficient
portfolio of indexes and periodically rebalance the allocation
to maintain consistent risk exposure. |
