exchange-traded fund (ETF)

Case Study Exchange-traded funds (ETFs) enjoyed rapidly increasing popularity following the 1993 introduction of the first of these hybrid investment vehicles. Part mutual fund and part stock, ETFs offer low expenses (little management oversight is required), continuous pricing (mutual funds are priced only at the end of each day), tax efficiency (infrequent trading produces few realized gains to distribute), and a financial asset that can be purchased on margin (like most stocks, but unlike mutual funds). EFTs were initially designed to track popular market indices, including the Standard & Poor's 500 and the Dow Jones Industrial Average. Soon after the turn of the century, investment firms began introducing more specialized ETFs that allow individual investors (wisely or not) to invest in narrow segments of the market, including particular industries, single countries, or groups of stocks with certain similarities such as a high dividend yield or low price-earnings ratio. Although EFTs tend to have low operating expenses, investors must still pay a brokerage commission to buy and sell the shares.