An exchange-traded fund (ETF) is an investment fund whose objective is to achieve the same rate of return as a particular market index, and will invest primarily in the securities of companies included in that particular index. These include indexes such as broad stock or bond market, stock industry sector, or international stock, but trades like a single stock.

ETFs are listed on stock exchanges and are traded throughout the trading day. According to the Securities and Exchange Commission (SEC), ETFs do not sell individual shares directly to investors. Instead, they issue shares in large blocks called “Creation Units.” In most cases, institutions such as brokerage organizations purchase Creation Units and, then often split up the units. They eventually sell the individual shares on the secondary market.

Benefits of ETFs include - but are not limited to - tax efficiency, lower costs, flexibility in trading, and diversification. ETFs usually generate lower capital gains because of the lower turnover rate. Since ETFs do not have to be “actively managed,” they generally have lower annual expenses. Since they are exchange traded, ETFs can be bought on margin, sold short, traded using stop and limit orders, and bought and sold at intraday prices. Since ETFs are comprised of a wide array of stocks, they provide diversification across an entire index.

The risks of ETFs are similar to any other diversified investments. If the entire market or an entire sector is in a downturn, then the ETF will usually be down as well. International ETFs may decline in value due to currency fluctuations or economic and political issues in foreign countries. In addition, an investor is not guaranteed that the ETF will perfectly match the gains that the mirrored index attains.

Additional information on ETFs can be found on the U.S. Securities and Exchange Commission Web site at http://www.sec.gov/answers/etf.htm Web site and on the NYSE Euronext Web site at http://www.nyse.com/attachment/amex_landing.htm.