What is an ETF investment?

Answer 1

ETFs are exchange traded funds. They allow immediate diversification for smaller investors. Unlike mutual funds they allow diversity with fewer limitations - they, like stocks, can be traded intra-day (mutual funds don't allow this), are often optionable (and can therefore be both traded and hedged using options), and represent groups of underlying instruments with a common "theme" - such as currency, geographic region (Southeast Asia, China), Gold, Oil, Health Services, Financial services, or a particular Index, etc.

An ETF is Index-linked, but is not to be confused with an Index Tracking Stock. An index tracking stock is similar, but tracks a particular index, is fully optional, trades large volumes and has a tight bid/ask spread, and can be used with sell stops and automated orders. Some common index tracking stocks track the S&P 500 (spy), Nasdaq 100 (qqqq), Russell 2000 (iwm), Dow Jones 30 (dia), etc. Some indexes may have more than one tracking stock.

There is an ongoing debate in the world of finance over whether or not a mutual fund manager can outperform an index consistantly (skill in picking or luck in picking?). Furthermore, some argue that mutual fund management fees may offset any additional gains from active management. Mutual funds offer "peace of mind" to those who prefer someone else do all the working and watching, ETFs and Index tracking stocks, because they are not actively managed, may require more oversight from the individual investor.

Many ETFs outperform mutual funds without fees. Many online brokerages have ETF scanners that allow you to look them up by region, industry sector, ranked by return, or by strategy (such as Growth, Income, Speculation, etc).

Note that current ETF Assets (in 2010) total over USD 1 trillion, the number grew from about $30 billion from 1999.