Tags: ETF investing | exchange traded fund

Although it sounds like an electronic device, ETF is actually the acronym for exchange-traded fund. An ETF is a basket of securities much like a mutual fund; however they trade on the open market exchanges just like stock.

As an investment instrument ETFs are still very young, having been around since the late 1980s. Their growth blossomed in the 2000s as multiple companies entered into the business and customers really liked the idea of more focused investment that offered lower costs than mutual funds. One of the largest ETFs is the Standard & Poor's Depositary Receipts (NYSE: SPY), it tracks the S&P500, a major index.

Today there are over 1,100 ETFs with asset a value of over $900 billion. They offer a tremendous variety of investment opportunities tailored to specific regions, sectors, commodities, bonds, future and other asset classes.

How does that basket of securities work? To help explain it let us look at one ETF, the fund KOL, which focuses or tracks to the coal industry index. If we are confident that coal will play a role in providing energy needs to world in the future this ETF is a great way to invest. Almost 80% of the portfolio is consolidated in ten of the key coal industry companies like Joy Global, Peabody Energy, CONSOL Energy and Alpha Natural Resources.

Why not just buy a mutual fund? There are several differences between mutual funds and ETFs, a key one is precision. As a general rule mutual funds are spreading the bets across many companies and industries, while a targeted ETF is focused on small group of companies. Expense wise, mutual funds cost more than ETFs as a percentage of assets invested.

ETFs are a fast-growing investment vehicle that offers the average investor a chance to effectively manage a portfolio in a diversified and low-cost way. The key is having a good trading strategy and following it!