This article is a brief introduction to explain what Exchange Traded Funds are, how they work, and how you can use them as part of your investment arsenal.
Basically, an Exchange Traded Fund is a collection of shares that will try to replicate the price action of a particular index such as the S&P500 or a market sector such as Energy or Technology.
Exchange Traded Funds were first introduced in 1989 on the Toronto Stock Exchange, and have gained popularity ever since.
The American Exchange lists over 100 Exchange Traded Funds. The first to be listed here was the SPDR in 1993.
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The Standard and Poors 500 Index (S&P 500) is basically an index of 500 stocks which are chosen to provide a wide range of industries, their liquidity, and market size which are traded on the New York Stock Exchange and the NASDAQ Exchange. The index is considered to provide a universal indication as to the market behaviour of the large caps. However, these 500 companies are by no means the biggest listed companies.
The companies are selected by a team of analysts at Standard and Poors called the S&P Index Committee. Standard and Poors is a company specializing in the financial research and analysis of stocks and debt instruments.
The S&P 500 dates back to 1923. When it was first formed it only contained 233 companies, but grew to contain 500 by 1957.
The NASDAQ 100 is the main index for the NASDAQ Stock Exchange. It is made up of the top 100 stocks on the exchange and does not include any financial companies or investment companies.
It is calculated as a weighted average in that some indexes affect its value more than others. Essentially bigger companies are more heavily weighted but some modification to the weighting is made to keep the large companies from completely overwhelming the smaller ones.
When investigating the NASDAQ 100 it is interesting to remember that it is made up of relatively new stocks. The oldest would only be about 25 years old but have proved themselves to dominate the market. This can be useful if you want to hold a portion of your investments in high tech companies.
However, it is important to remember that because of it’s heavy weighting in this financial area - the NASDAQ 100 can be very volatile.
Some companies that are included in the NASDAQ 100 are Apple Computer Inc (AAPL), Dell Inc (DELL), eBay Inc (EBAY) and Microsoft Corporation (MSFT).
The DJIA (Dow Jones Industrial Average) is a stock market index which tracks 30 stocks on the NYSE and serves as an indicator as to how the price of stocks are performing on the stock market in general.
The 30 stocks are typically picked based upon such factors as excellent reputation, sustained growth, being of interest to a large number of investors and representing the sectors covered by the average. At the time of writing (September 2005) some of the stocks represented in the DJIA are International Business Machines Corp. (IBM), Walt Disney Co. (DIS), Microsoft Corp. (MSFT) and General Motors Corporation (GM). A full list can be found at Yahoo! Finance.
The DJIA was originally Calculated by simply adding the price of the stocks and then dividing by then number of stocks (30). However, for some time it is calculated by applying an adjuster to the divisor. This current divisor value is 0.12560864.
If you want to find out more about the DJIA then try visiting Dow Jones Indexes.
