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What is Index Shares (ETFs)?

Index shares are also called Exchange Traded Funds (ETFs). Exchange Traded Funds trade on the major exchanges like any ordinary stock, but rather than representing an individual stock, index shares track an entire basket of securities.

Standard & Poor's Depositary Receipts were the first ETF (created in 1993); they trade on the AMEX under the symbol “SPY”. The SPY are also known as SPDRs (pronounced "Spiders"). Following the introduction of the spiders, other ETFs followed. Among them are the Dow Diamonds (AMEX: DIA), a basket of the 30 Dow stocks, as well as the NASDAQ 100 Shares (NASDAQ: QQQQ), also known as the “cubes” or “Qubes”, which track the NASDAQ 100 stock index. The QQQQ have only been available since March 1999, but they have become so popular that their daily trading volume rivals that of most companies on the New York Stock Exchange. In fact, only three companies on the Big Board are traded more briskly.

Index shares give you a wide range of investment options:

• A single transaction gives you access to a basket of stocks. ETFs provide instant exposure to a diversified portfolio, perhaps their greatest benefit;

• Ability to buy on margin. While we do not advocate borrowing money to buy stocks, this feature of ETFs can be very advantageous for the seasoned trader;

• Ability to sell ETFs short, even on a down tick (i.e., when the last sale price is below the preceding sale price);

• ETFs may be purchased and sold throughout the trading day, making them a superior alternative to mutual funds, which are priced only once a day (at 4 p.m.);

• Affordability through reduced costs (there is no need to buy numerous stocks);

• Traders may purchase as few as a single share;

• No management and sponsor fees;

• Opportunity for dividend income;

• Trading ETFs is easy and convenient;

• ETFs are tax efficient.

Thanks to these features and benefits, the popularity of ETFs has soared in recent years. In fact, they have become an entirely new investment category - representing one of the most flexible, multi-purpose trading vehicles available.