Investors now claim that availing of an exchange-traded fund (ETF) as an investment scheme is wiser than maintaining a direct stock. It is tax-efficient and low cost. In this article, we will give you an ETF definition that every beginner should know.

An ETF is an investment portfolio that allows you to control instruments that are traded on stock exchange. Given this fund, you have the ability to manipulate bonds and stocks in your portfolio. 67 percent of investors have attested to the innovativeness of this fund in 2008.

As early as 1993, this investment scheme has caught the eye of investors in Wall Street and Main Street. Like indexed mutual funds, they offer stocks in diverse recognized indexes.

Stocks and ETF are two different concepts. An ETF can index and fund unlike stocks. In stocks, you have no freedom in manipulating your investment portfolio. Because of this ability, exchange-traded fund is also called an index fund. Among the many indexes that an investor can track is the Dow Jones.

ETF definition has been around in the investment world for around 2 decades. Many investing professionals switch to this innovative investment scheme because of the following benefits:

• Exchange-traded fund is a low cost investment. For example, VIPER Vanguard Stock Market, an ETF that tracks index of US stocks demands only an annual cost of .07 percent from the overall assets. In other words, a $ 20,000 investment only costs the investor $ 14 only per annum.

• It is tax efficient. It does not need to buy or sell securities unlike stocks. The investor will pay less tax since this method does not require a taxable gain to be forwarded to the account. Even if an ETF can make taxable gains, it is purchased as a stock. They will not be redeemed by the holders.

• It offers flexibility. Unlike other investment schemes, Exchanged-Transfer fund are very flexible. For example, a mutual fund is only priced one time after the trading day while an ETF is sold like stocks that you can buy on margin and you can automatically sell it in any market condition.

• It also provides diversification and exposure. You can rebalance your portfolio allocations by investing it any time at any market. This is true to an entire index. You will then have transparency to different market index which includes sector-specific, bond, commodity, country-specific, international, and local indexes.

• You have a transparent view on your ETF. You have the active power to manage and control your investment portfolio at any time of the trading day.

There are different types of ETF that are available to authorized investor participants: Index, Exchange Traded commodities, Bond ETFs, Currency ETFs, Actively Managed ETFs, Grantor Trust ETFs, Hedged Fund ETFs, and Leveraged ETFs.

Investors can choose to put their capital in a growth-structure ETF or Value-structure. A growth investment is more expensive than a value investment.

As a summary, the ETF definition is s stock-like fund that has a dual feature of a mutual fund and tradability of a closed-end fund.