Subject: Stocks - Exchange-Traded Funds and Unit Investment Trusts

Last-Revised: 7 Oct 2004
Contributed-By: Chris Lott (contact me)

An exchange-traded fund, also known as a unit investment trust, is a collection of securities such as stocks or bonds that are bundled together in a special vehicle that happens to be a trust. Investors can buy tiny little pieces of the trust ("units"). So although a UIT looks like a mutual fund in that it bundles things together and sells shares, the units are listed on an exchange and trade just like stocks. Exchange-traded funds are usually set up to mirror a well-known stock index. The most well-known example is the Standard & Poors Depositary Receipt (SPDR, see below).

A UIT that mimics some index is in many ways directly comparable to an index mutual fund. Like an index fund, it's diversified and always fully invested. Like a stock, you can buy or sell a UIT at any time (not just at the end of the trading day like a fund). And for the serious traders out there, you can short many UITs on a downtick, which you cannot do with stocks.

Below is a list of some of the common UITs/ETFs out there. All of these are created by large financial institutions, and usually (but not always) charge modest annual expenses to investors, commonly 0.2% (20 basis points) or less. Any commissions paid to buy or sell them are paid to a broker, of course.

• UIT that mimics the NASDAQ 100 Index, commonly called a Qube. Trades as QQQ on the AmEx and has a value of approximately 2.5% of the NASDAQ 100 index. As of this writing, the trust has about $12 billion. More information is available from the NASDAQ:
  http://www.nasdaq-100.com/indexshares/nasdaq100_intro.stm
• UIT that mimics the Dow Jones Industrial Average. Named the Dow Industrial Average Model New Depositary Shares, commonly called DIAMONDS. Trades as DIA on the AmEx and has a value of approximately 1% of the DJIA. More information is available from the AmEx:
  http://www.amex.com/?href=/etf/EtMain.jsp
• UIT that mimics the S&P 500. Named a Standard & Poors Depositary Receipt (SPDR), commonly called a Spider or Spyder. Trades as SPY on the AmEx and has a value of approximately 10% of the S&P 500 index. As of this writing, the trust has nearly $18 billion. More information is available from the AmEx:
  http://www.amex.com/?href=/etf/EtMain.jsp
• Select sector SPDRs - these slice and dice the S&P 500 in various ways, such as technology companies (symbol XLK), utilities (XLU), etc. All are traded on the AmEx. More information is available from this site:
  http://www.spdrindex.com/
• Some companies offer ETFs that do not mirror a well-known index, but instead are proprietary to that company. One example is Vanguard's Index Participation Equity Receipts(VIPERS); more information about those is available at http://www.vanguard.com

The following resources offer additional information about exchange-traded funds and UITs.

• ETF Simplified offers a beginner's guide to investing with exchange-traded funds.
  http://etfsimplified.com/