Index ETF

[Md. Al-Amin]

Index ETF

Like other ETFs, an index ETF is essentially a passive mutual fund -- similar to traditional index funds -- that allows investors to purchase a basket of securities in a single transaction. An index ETF mimics part or all of an external index.

How it works/Example:

For example, the iShares Dow Jones Select Dividend Index Fund is an ETF that invests in the 100 stocks contained in the Dow Jones U.S. Select Dividend Index.

ETF shares are essentially legal claims to underlying shares held in a trust by the fund's creator or authorized participant, which is usually a market maker, specialist or institutional investor. These underlying shares are grouped into creation units, and the ETF shares are fractions of these creation units.

Unlike traditional mutual and index funds, ETFs have no front- or back-end loads. In addition, because they are not actively managed, most ETFs have minimal expense ratios, making them much more affordable than most other diversified investment vehicles. Most mutual funds also have minimum investment requirements, making them impractical for some investors.

Why it Matters:

Although ETFs hold the same stocks as their underlying indexes, the selection of the index on which to base and benchmark the fund is important because there are a variety of indexes. The Dow Jones U.S. Select Dividend Index, for example, selects 100 stocks based on whether and how much the each company has increased its dividends, each stock's trading volume over time and a variety of other factors. Some indexes include smaller companies, and some stick with larger companies; some stocks also appear in more than one dividend-stock index. Additionally, many dividend-stock indexes have assets in the same industries because some industries (utilities and financial services, for example) commonly pay dividends.

http://www.investinganswers.com/financial-dictionary/mutual-funds-etfs/index-etf-5524

[munna99185]

Index ETFs may occasionally trade at slight premiums or discounts to the fund's NAV, but any differences will quickly be ferreted out through arbitrage by institutional investors. In most cases, even the intraday prices will correlate rather precisely to the actual value of the underlying securities. Additional options are available such as leveraged ETFs or short ETFs, which will have a compound or inverse response, respectively, to the underlying index. Index ETFs can be found based on most of the major indexes such as the Dow Jones Industrial Average, the S&P 500 and the Russell 2000.
Costs are comparable to the cheapest no-load index mutual funds as measured by the expense ratio, but investors will typically have to pay standard commission rates for ETF trades. Mutual fund commission rates are typically lower than for exchange-traded securities.
Index ETFs can be set up as either grantor trusts, unit investment trusts (UITs) or open-ended mutual funds, and will have slightly different regulatory guidelines as a result. Most index ETF shares can be traded with limit orders, sold short and purchased on margin. [Source: http://www.investopedia.com]

Sayed Farrukh Ahmed
Assistant Professor
Faculty of Business & Economics
Daffodil International University