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

Last-Revised: 26 Sep 2010
Contributed-By: Chris Lott (contact me)

An exchange-traded fund is a collection of securities such as stocks or bonds that are bundled together in a special vehicle. The legal entity, that special vehicle, happens to be a unit investment trust. Investors can buy tiny little pieces of the trust ("units"). So although an exchange-traded fund (ETF) 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. When exchange-traded funds first started trading, they often were set up to mirror a well-known stock index. A very well-known example is the Standard & Poors Depositary Receipt ETF (SPDR, see below). Since then ETFs have been established for many, many different categories of assets and investments.

An ETF that mimics some index is in many ways directly comparable to an index mutual fund, but it's also comparable to a stock. Like an index fund, it's diversified and always fully invested. Like a stock, you can buy or sell an ETF 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 ETFs on a downtick, which you cannot do with stocks.

Below is a list of some of the common 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.

  • ETF that mimics the NASDAQ 100 Index, commonly called a Qube. Trades under symbol QQQQ on the NASDAQ. More information on ETFs is available from the NASDAQ:
  • ETF that mimics the Dow Jones Industrial Average. Named the Dow Industrial Average Model New Depositary Shares, commonly called DIAMONDS. Trades under symbol DIA on the NYSE. More information about listed funds is available from the NYSE:
  • ETF that mimics the S&P 500. Named a Standard & Poors Depositary Receipt (SPDR), commonly called a Spider or Spyder. Trades under symbol SPDR on the NYSE. More information about listed funds is available from the NYSE:
  • Many 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

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