In previous posts, we’ve talked about mutual funds and some of the details of how mutual funds work.  Now we turn our attention to a similar investment tool called exchange-traded funds (ETFs).

Exchange-traded funds are similar to mutual funds because in both cases the end result is a pool of securities that are owned by many different shareholders.  Both ETFs and mutual funds employ portfolio managers to manage the portfolio.  Both ETFs and mutual funds have both indexed and actively-managed funds.

How an Exchange-traded Fund is Created

An exchanged-traded fund is created by an organizer file the required paperwork with the Securities and Exchange Commission (SEC) which process is call registration.  Once the SEC has accepted the registration (remember, the SEC doesn’t ever approve an investment or investment product), the ETF organizer (sometimes called an ETF sponsor) basically trades shares for a basket (or portfolio) of securities that meet (or fit) the investment objectives of the ETF, as outlined in the ETF’s prospectus.  After the exchange, the shares of the ETF are allowed to trade on an exchange.  This creation process can be ongoing which allows the ETF to grow in size.

How Shares of an ETF are Bought and Sold

An investor can buy or sell shares of an ETF at any time during a trading day.  When an investor buys shares in an ETF they are buying those shares from another investor.  With trading throughout the day, the price of the ETF shares is constantly changing and an investor does not have to wait until the end of the day to buy or sell their shares.

ETF Advantage

For independent individual investors, an exchange-traded fund offers an investment tool that contains many different securities giving the investor the ability to gain diversification with very few investment dollars.  An exchange-traded fund also allows the independent investor to purchase shares in the ETF in very small quantities, even a single share.  This gives the independent investor the ability to purchase a single share in a large portfolio of securities.  Being able to buy a single share means the ETF may be the most accessible pooled investment tool available to the $100 Investor.

I like ETFs and find them very useful.

Other ETF topics that we’ll address in future posts include:

Costs of buying a mutual fund or ETF share

Annual expenses of mutual funds & ETFs

And here’s the necessary legal & compliance stuff:

Disclosure & Disclaimer

I am a practicing certified public accountant (CPA) and am licensed in the states of Oregon and Washington and own a CPA firm, CPA Worx LLC, and have practiced for more than 25 years.  I teach accounting at Oregon State University and have taught at the college/university level since 1997. 

I also own a registered investment advisory firm, Peacock Investment Worx LLC.  In the $100 Investor project, I am not offering recommendations of any kind nor am I providing tax, accounting, or legal advice.  I do not receive any type of compensation, of any kind, from the brokers, companies, mutual funds, exchange traded funds, websites, authors, publishers, investment managers, or anything or anyone else that I mention in this project.  True, my clients compensate me for my work and advice.  Many people do not want to invest on their own so I provide my investment services for a fee through Peacock Investment Worx LLC.  But the $100 Investor project is my way of helping anyone and everyone that wishes to invest on their own.  I want to support the independent investor.

Peacock Investment Worx LLC can be found online at www.peacockinvestmentworx.com and on Facebook at 100 Dollar Investor.

CPA Worx LLC can be found online at www.peacockcpaworx.com and on Facebook at CPA Worx.