Exchange Traded Fund - ETF

A fund publicly traded on exchanges that is similar to closed-end funds but usually specializes in various indexes or sectors in equities(or bonds). Consequently, there is little turnover and a lower expense ratio with few tax implications. They can be an easy way for investors to hold a certain index due to their liquidity or to invest in a certain sector and have immediate exposure to diversification, for example investing in XLF would give an investor exposure to banking, brokerage and other financial stocks.

In recent years, there have been innovative creations, such as ETFs that attempt to track commodities (for example USO attempts to track oil and DBA attempts to track agricultural commodities), currencies (for example FXE which holds Euros), and ETFs that go up in value when the benchmark index tracked is down (short ETFs like QID). This gives the individual investor a much easier way to hedge against adverse market conditions or make directional bets against the market without using options or futures. It also gives the individual investor a low cost way to hold and trade various commodities.

Further Reading: 40 Short ETfs, 24 Long ETFs.

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