1. Explain how an ETF works

2. What type of investor will purchase an ETF?

3. Pros and cons of ETF

Are you familiar with the Dow Jones or the Standard and Poor's 500?

They are stock averages that are the most widely followed by most investors.

the Dow Jones is composed of 30 industrial type companies. Buy the ETF DIA and that fund will track what the Dow does, up or down.

SPY does the same thing for the S&P 500.

The investment firm acquires a portfolio of stocks to accurately track the selected "stock segment".

Hundreds of ETF's have been created to follow other stock averages, from the entire stock market to various narrow segments.

Investors that want to diversify their holdings would be a candidate for an ETF.

Pros:

diversification

safety

usually low administrative fees

ease of trading

low cost of acquisition and sale (through a discount broker)

Cons:

Pick the wrong segment of the market to invest in- lose capital.

Does not have investment manager "making decisions"

Go to Couch Potato Investing (assetbuilders.com), Vanguard, Fidelity, Yahoo Finance, Motley Fool.

That is the short version. Go to Harvard Business school and get the same info, only in the long version.

For equity index ETF Market Maker buys constituent shares and swaps them for ETFs from the ETF provider. MM sells/trades ETFs.

With Physical gold ETF provider buys gold bullion and deposits it with registered gold vault, then issues ETFs against the amount of gold.

Some ETFs represent non-physical instruments so thses are swapped against futures contracts etc.

2. Either smaller investor who wants diverification. Or maybe large investor with cash to be invested quickly into, say equities, if market is rising fast- quicker than selecting individual stocks.

3. Cheap tracker fund. Passive so no chance of beating the market (or sector, whatever). Risky if non-vanilla ETFs (for example 2X underlying)

1. Explain how an ETF works

2. What type of investor will purchase an ETF?

3. Pros and cons of ETF