Editor's Note: This story was originally published Sept. 12, 2003 on RealMoney

There's clearly a lot of interest in exchange-traded funds, and the folks at RealMoney are dedicated to covering this quickly growing area of the investment landscape. In that vein, here are answers to some of your ETF-related questions.


Question: I've heard a lot of talk comparing ETFs to mutual funds. What are the advantages of ETFs over mutual funds?

Answer: ETFs have a number of advantages vs. mutual funds:

  • Transparency: Mutual funds only report their holdings twice a year, so you never really know what the fund currently owns. With an ETF, however, this information is readily available; you always know the underlying stocks that you own.

  • Buying and selling flexibility: Mutual funds trade based on the day's closing net asset value, or NAV. ETFs trade throughout the day, just like a traditional stock. ETFs can also be sold short, while mutual funds cannot.

  • Tax efficiency: Mutual fund managers' trading creates a taxable event; ETFs tend to generate fewer capital gains.

  • Cost effectiveness: ETFs generally have much lower annual expense ratios than mutual funds, which significantly impacts total return.


Question: How can I determine which stocks are represented in a particular ETF? Could you provide links to a site that provides lists of the stocks that make up the ETFs?

Answer: One of the many advantages of ETFs and HOLDRs is transparency: You know what you're buying. As I mentioned earlier, mutual funds only disclose their largest holdings twice a year, which causes the data to be both stale and incomplete. Unlike mutual funds, however, investors in ETFs or HOLDRs can easily determine what they own.

Investors in any one of the HOLDRs can go to the HOLDRs Web site and find the stocks that make up their investment.

Most iShares ETFs fully replicate the index they are tracking. In other words, the ETF is composed of the same stocks with the same weightings as the index it tracks. Some iShares, however, invest in a sampling of stocks that make up the index. In either case, portfolio holdings are updated monthly on the iShares Web site .

More information about ETF holdings can be found at ETF Connect .


Question: Can you trade options on ETFs?

Answer: Many ETFs have options available. You can check with your broker to see if options are available for a particular ETF, but for iShares, you can refer to the iShares Web site . In the far right column of each "Fund Details" section is an indication of whether options are available for each ETF.

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