An exchange traded fund (ETF) is a collection of securities much like an index mutual fund. This collection, or basket, of securities is traded on an exchange.

Because ETFs are like stocks, they are more flexible than a mutual fund. ETFs can be purchased and sold on each trading day. Traders are able to buy ETFs on margin and ETFs have very low expenses.

ETFs incur commissions when traded, and they must usually be purchased through a broker. ETFs are different from mutual funds in that they may not trade according to the net asset values of the fund holdings. The ETF might actually trade above or below the worth of its holdings.

Because ETFs incur commissions each time they are traded, mutual funds may be a better deal for the investor. Mutual funds make more sense for an investor if the investor is contributing a small amount each month to an investment (if the investor did this with an ETF, commissions would be incurred for each transaction). ETF commissions can accumulate quickly. An active trader might also benefit by investing in a mutual fund (with no commission charge for transactions) rather than an ETF – again, because of the potential for commissions to get very expensive.

Many ETFs are index funds, but there are also commodity ETFs, actively managed ETFs, and Exchange-Traded Grantor Trusts (which invests in stocks from a particular industry).

See the SEC Web Site (http://www.sec.gov/answers/etf.htm) for more information on ETFs.