Exchange-traded funds (ETFs), were first introduced in 1993 and allow investors to trade index portfolios just as they do shares of stock. The first ETF was the Standard & Poor's Depository Receipt, known as the "spider" which held a portfolio matching the S&P 500 index. Investors were able to trade the "spiders" throughout the day, unlike mutual funds which can be bought and sold only at the end of the day after NAV's calculation. Spiders gave rise to many similar products such as "cubes" - based on the NASDAQ 100 index - "diamonds" - based on Dow Jones Industrial Average - and "WEBS" - World Equity Benchmark Shares.
ETFs offer lots of advantages compared to the mutual funds. First of all, as already mentioned, in the mutual funds investors can buy or sell their shares only once a day. ETFs trade continuously and can be sold short or purchased on margin.
Moreover, ETFs offer a potential tax advantage over traditional mutual funds. When investors want to redeem their position in an ETF, they will simply sell their shares to other traders. When large numbers of mutual fund investors redeem their shares, the fund manager has to sell securities to meet the redemption and this can trigger capital gain taxes.
Dealing with ETFs will also make you save money since they are cheaper than mutual funds. Investors who wish to buy ETFs do so through brokers rather than buying directly from the fund. In this way, the fund saves the cost of marketing itself directly to small investors and this translate into lower management fees.
Mr. Andrea Ferrante