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What Are ETFs?

The term ETF is short for Exchange-Traded Fund – a security that tracks an index, commodity or basket of stocks. An ETF is somewhat similar to an index fund except that shares of an ETF trade just like a stock on a stock exchange, so they can be bought and sold very easily. ETFs are valuable investment tools because, unlike mutual funds, they can be traded throughout the course of a day.

Most ETFs track indexes. For example, the SPDR S&P 500 (NYSE: SPY) tracks the Standard & Poor’s 500, while PowerShares QQQ (NYSE: QQQ) tracks the Nasdaq-100.

ETFs can be appealing to investors for several reasons:

ETFs allow investors to sell short, buy on margin, and purchase as little as one share at a time

With lower management fees, ETFs are less expensive than mutual funds

ETFs can efficiently help diversify an investor’s portfolio

ETFs allow people to invest in a specific industry

ETF gains aren’t taxed as heavily as those earned through mutual funds

Downsides to ETFs are that, like stocks, they typically have to be bought through a broker; some countries have limited ETF markets; and they aren’t all necessarily designed for long-term investors. While not for everybody, ETFs are a good way for investors to diversify their portfolios at a low cost.

To browse through a comprehensive list of ETFs, visit Yahoo! Finance’s Exchange-Traded Fund Center.

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