American Association Of Individual Investors - AAII

Finance allah shmoop shmoop what are efs Well first this

is the random financial terms you want to be asked

in the financial term spelling bee and second you should

know that e t f stands for exchange traded fund

f's are kissing cousins of index funds with one key

subtle but important difference f don't change at least generally

speaking an index fund might reflect the transportation industry and

have so much exposure to ford gm united airlines tesla

etcetera But it's required tohave say sixty five percent of

its exposure to companies based in the united states in

its charter every month that index fund has to re

balanced that exposure So if the auto companies do very

poorly in a given month index fund has to re

balance by buying mohr shares of those auto companies to

make up the difference you know given that they've performed

poorly relative toa airlines trucking company's railroads jeff howard segways

and so on But in a t f the fund

is basically set once and the shares just really kind

of float if over a decade the auto companies do

really well then in an e t f the auto

companies will just have a dominant influence on the overall

performance of the fund The management company doesn't have to

buy and sell shares regularly in an e t f

till fulfill the legal promises it agreed to at the

outset of the fund in the way in index fund

re balances its shares by buying and selling them So

what does that mean to you Well it means that

fc may drift in given directions like this guy For

example a generic technology e t f might have had

a total exposure of say five percent to internet stocks

in the beginning of nineteen ninety seven but amazon ebay

yahoo netflix and a well performed massively better than the

broader technology market which did well but just not omg

dot com well so that five percent waiting twenty years

later might be more like fifty percent or mohr of

that particular e t f but one other key aspect

of it is that it's traded like a stock i

e in one block and trade throughout the day there's

a bid and an ask price The bids are all

added up and shares in the fund can be bought

And sold at any time throughout the day Although the

market sets the price of an f just like it

does on a stock Well there now you're all ready

for the financial term spelling bee And they might also

ask you to spell lipo Yeah you might want to 00:02:33.69 --> [endTime] write that one on your arm