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ETFs Basics (1)

By Rick Walter

"Exchange-traded funds, or ETFs, are investment companies that are legally classified as open-end companies or Unit Investment Trusts (UITs), but that differ from traditional open-end companies and UITs in the following respects:
ETFs do not sell individual shares directly to investors and only issue their shares in large blocks (blocks of 50,000 shares, for example) that are known as "Creation Units." Investors generally do not purchase Creation Units with cash. Instead, they buy Creation Units with a basket of securities that generally mirrors the ETF’s portfolio. Those who purchase Creation Units are frequently institutions.

After purchasing a Creation Unit, an investor often splits it up and sells the individual shares on a secondary market. This permits other investors (You) to purchase individual shares (instead of Creation Units). I have had limited success buying and selling ETFs earlier this year. Many of them are way-y-y down. Many ETFs are very diversified, have high institutional support, reliable benchmarks, and small floats, but most of all I noticed their resilience during market downturns.
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